In response to tax changes that would allow a higher percentage of tax-free ad spending, Chinese companies are brewing more aggressive advertising strategies for next year.

Set to take effect in 2008, the new tax code comes at a time when the importance of advertising to mid- and small-sized companies is growing, especially in preparation for the coming 2008 Olympics.

The ratio of ad spending to revenue is now set at 2 percent, with taxes levied on amounts greater than that. The new bill would raise the ceiling.

"The new rule will probably stir up enthusiasm for spending more on advertising," An Tifu, senior professor at Renming University of China's Business School, told China Daily.

"Although the ratio is unclear, it should be much higher than before," he said.

"Details like fixing the ratio of ad fees to sales revenue will not be discussed until March," said Liu Shangxi, a senior professor from the Scientific Research Institute under the Ministry of Finance.

The bill to unify corporate income tax rates for both domestic and overseas-invested companies at 25 percent was proposed to the Standing Committee of the National People's Congress (NPC), the country's top legislature, on December 24, 2006.

The new corporate tax law is expected to be enacted at the March meeting of the NPC and will take effect in January 2008.

Domestic companies are delighted to see the new rule.

"It is good to hear that, and we would accordingly adjust our advertising strategy and increase our ad budget," said Zhao Yuanhua, spokesperson with Inner Mongolia-based Mengniu Dairy Industry (Group) Co Ltd (Mengniu).

The leading dairy producer in China, Mengniu has a high profile through its various ads, especially on China Central Television. Its annual advertising expenditure is about 8 percent of its sales revenue, said Sun Xianhong, Mengniu's vice-president.

Mengniu is not alone in its desire to increase ad spending. "We will have people closely study details of the new corporate income tax after they come out and re-evaluate our ad strategy and make some changes," said Lai Shixian, vice-president of ANTA (China) Co Ltd.

ANTA is one of the two leading sportswear manufacturers in China, with annual ad expenditure of 4 to 5 percent of sales, Lai said.

Wu Xingqun, deputy general manager with Fujian Septwolves Industry Co Ltd, a well-known local leisure wear brand, said the company would also consider increasing its ad budget.

Chinese wine manufacturers might be the biggest beneficiaries from the ratio increase. Wine manufacturing has been the only sector without a tax-free ratio.

"We welcome the new rule, and would benefit from it, but not that much," said Zhang Fan, from Kweichow Moutai Co Ltd's advertising department.

But by how much they will increase the marketing budgets is still unclear. Managers unanimously said they would be careful and do it in a reasonable way.

"We have a target for profits, and we cannot spend as much as we would like," said Sun.

"The new rule would be a factor, but not the only factor, when it comes to increasing our ad budget," said Lai.

Foreign players need not worry about how much they spend on advertising as spending is allowed as a cost item the more they spend on ads, the less income tax they pay.

Domestic companies have long viewed this as unfair treatment and have urged changes in the tax code.

In 2001 the Chinese government raised the ratio up to 8 percent for some industries, including medicine, food, home appliances, real estate, and chemical products, and provided preferential ratios to high-tech companies.

(China Daily January 31, 2007)