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Will China's Telecoms Dodge a Major Tax Bullet?

BEIJING (TheStreet) -- Between the lines of an otherwise dull announcement about building mobile phone towers was an assurance for investors that China's telecom operators expect to weather the storm of a new tax regime.

That assurance in the face of a tough VAT regime announced this week by the government helped China Mobile (CHL), China Telecom (CHA - Get Report) and China Unicom (CHU - Get Report) survive a tumultuous trading session Friday on the Hong Kong Stock Exchange.

Shares in each of the state-run carriers opened sharply lower following the May 1 holiday after the Beijing government unveiled the tax plan late Wednesday. Telecom services will be taxed starting June 1 in a way that, according to the companies, could slash annual earnings up to 36%.

On the tax announcement, telecom share prices slipped as much as 3.5% during the trading day before rebounding. China Mobile closed 0.8% lower at HK$73.10 per share, China Unicom finished down 1.8% at HK$11.68, and China Telecom ended the day unchanged at HK$3.98.

Investors apparently found solace in separate China Mobile and state media announcements Friday that the three carriers had formed a joint venture to build towers nationwide -- perhaps 750,000 units this year alone -- to carry fourth-generation (4G) Internet and mobile phone signals.

The investment project is expected to offset at least some of the higher taxes because, according to VAT rules imposed by the government's State Administration of Taxation, capital expenditures will be deductible under the new regime.

And the joint venture, tentatively named "State Tower," has a massive and expensive job ahead.

This year alone China Mobile plans to add 500,000 towers to accommodate 4G customers, state media said Friday, while China Telecom could install up to 250,000 towers. Similar building plans have yet to be announced at China Unicom, which got regulatory permission to offer 4G services only last month.

The new 11% VAT on basic telecom services and 6% on value-added services will replace the current 3% business tax, the government said.

China has been slowly phasing out its business tax industry by industry and phasing in the VAT, which is easier to levy and, officials say, fairer for taxpayers. A VAT for the cargo and logistics industries came into full force last September, and railroad services are slated to be added by 2015.

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