China Loosens Rules on Pre-tax Advertising

Newly adjusted rules on advertising expenditures can help enterprises that suffered from previously strict controls maintain market shares, but the changes might not leave enough room to promote new brands, advertising experts said.

The government Tuesday loosened restrictions on pre-tax advertising cost limits, raising the spending limit from 2 per cent to 8 per cent of a company's sales volume from the previous year.

Those in the advertising know say the change will help some firms but will eventually amount to little help for struggling companies.

"The restrictions have already lost authority and enterprises have now found ways to sneak around them,'' explained K. C. Liu, an advertising researcher.

Liu made the comment after the State Administration of Taxation declared it would allow greater spending on advertising for consumer products, properties and some services.

The previous 2 per cent limit had been imposed on January 1 2001 to prevent companies committing tax evasion by claiming to pour large chunks of their pre-tax revenue into advertisements to increase apparent costs and reduce tax payments.

The adjustment now allows high-tech firms, websites and venture capital companies to advertise without restrictions for five tax years after they begin business.

The administration made the change after the 2 per cent restriction prompted a number of complaints from media and advertising agencies.

Insiders reported that advertising income for most Beijing-based newspapers and TV stations decreased about 30 per cent during the first half of the year.

The State taxation administration refused to comment on the adjustment, but analysts suggested pressure from media played a large role in hastening the decision.

Analysts said the policy shift also reveals that the government is becoming more responsive to market reactions.

"Things have become better now, but the step is not enough,''said Zhang Shuting, a researcher with the advertising department of the Beijing Broadcasting Institute.

"In a period of brand establishment, the 8 per cent advertising spending is not enough,'' Liu explained.

Money spent on advertising a new brand is crucial to making that brand known to consumers, meaning companies must often spend above an 8 per cent ceiling, even if it means losing money in the short term.

By only allowing high-tech firms to freely spend on advertising, the adjusted tax policy may solve part of the problem.






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