When Chinese President Xi Jinping visited Ulanqab in Inner Mongolia in mid-October, he was briefed on its computing industry and called for efforts to “extend the industrial chain” and keep “transforming the strength in computing into development advantages.” Ulanqab is cold, electricity is cheap, and Beijing is close, so the city became a hub of the data-center boom powering China’s AI race with the United States. Yet a city official told the Economic Observer that the industry is still “losing money” and that tax revenue will build up gradually only once projects under construction start operating.

After the data centers open, however, the companies selling cloud services and AI models pay the tax on those sales in Hangzhou and Beijing, where they are registered. Most of the tax that stays in Ulanqab is paid during construction. If nothing changes, Ulanqab will struggle to turn its computing advantage into a development advantage of its own.

In China, where tax is paid depends on where the invoicing company is registered. Both value-added tax (VAT) and corporate income tax are paid there, and the local government keeps half of the VAT and 40 percent of the corporate income tax. If you rent a server on Alibaba Cloud, you can choose a data center in Ulanqab, but the invoice comes from the company registered in Hangzhou.

Alibaba and ByteDance both have subsidiaries in Ulanqab, but those subsidiaries do not invoice customers for cloud services and AI models. Alibaba Cloud lists the companies that invoice for its main products. None of them is a wholly owned Alibaba subsidiary in Ulanqab, and none is registered in Inner Mongolia. ByteDance registered three subsidiaries in the city in 2026, yet invoices for its cloud business, Volcano Engine, still come from a Beijing company.

In the same Economic Observer report, a local tax official said a data center generates most of its local tax during construction. Once a data center is operating, company headquarters sell most of its data services. What remains locally is mainly taxes on land and buildings and employees’ personal income tax. The number of employees is limited, however; a completed gigawatt-scale campus usually has only a few hundred operations staff.

Not much revenue stays where the data center is built. In 2025, Ulanqab’s computing industry paid 368 million yuan ($55 million) in tax, less than 5 percent of the city’s revenue. China Taxation News, the State Taxation Administration’s newspaper, reported that tax from the city’s computing industry rose more than 60 percent year-on-year in the first eight months of 2026. But construction has not stopped, so that increase cannot tell us what happens after the data centers open. When construction ends, construction-phase tax will recede. Taxes on land and buildings recur every year, but they depend on the site and the property, not on sales.

Liu Huansuo, deputy director of Ulanqab’s big data administration, told Xinhua: “If we rely solely on cheap electricity and low land costs, we risk becoming little more than ‘landlords of server rooms.’” That is a problem for Ulanqab’s finances. 

In 2025, the city’s own revenue covered less than a fifth of its spending, and higher levels of government supplied more than half of its available funds. Those governments decide how much Ulanqab receives; the city decides for itself how to spend local tax revenue. Yet as data centers based in Ulanqab sell more and more cloud and AI services, the tax revenue goes to Hangzhou and Beijing. If Ulanqab is to “extend the industrial chain,” it will probably still need money from higher levels of government.

Some places in China do capture the tax on cloud services because the invoicing company is registered locally. Gui’an New Area in Guizhou is one of them. In the first 10 months of 2025, digital companies in Gui’an recorded 75.2 billion yuan ($11.2 billion) in invoiced sales, nearly 90 percent of it from 18 firms, including Huawei Cloud and Tencent. Huawei Cloud has announced that contracts and invoices for its customers in China will mainly be signed and issued by a company registered in Gui’an. Firms are willing to register an invoicing company in Gui’an, but they will not set one up everywhere they have a data center.

Alibaba and ByteDance can argue the profit comes from their models and customers, so paying the tax at headquarters is reasonable. That is a fair point, yet it leaves the host area in the lurch. Ulanqab can keep the tax paid during construction and the taxes on land and buildings, but neither will grow the way sales do to support sustainable development.

As the national “East Data, West Computing” program moves data centers west to power China’s AI push, other western places that host data centers face the same arithmetic – unless the invoicing companies register there. Ulanqab’s 109 signed data-center projects are expected to come online within two to three years. Once construction stops, the city’s tax take from computing may stop growing, and with it the chance to turn data centers into lasting development.