No More Tax Breaks

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Tax debates may not be the most exciting sort, but the one that has been raging over incentives for foreign-invested enterprises in China is certainly worthy of attention. The story has been around for a while (see here and here), but it seems that a conclusion is almost upon us thanks to the latest deliberations at the National People’s Congress (NPC). The result (passage of the measure is expected to be a formality, and to be confirmed next week), which is expected to be implemented from the start of next year (with a five-year transition period), is as predicted, and FT says:

    “China ended almost 30 years of favourable treatment for foreign companies on Thursday with the introduction of a measure to equalise corporate tax rates paid by local and overseas enterprises.

    The law, introduced at the National People’s Congress, will immediately benefit Chinese companies, which have long complained about discrimination in favour of foreigners.

    It will see a single tax rate of 25 per cent levied on all companies. Under the current system, Chinese companies have been taxed at up to 33 per cent while foreign enterprises have paid as little as 15 per cent.”

While the unification of tax rates was increasingly inevitable – especially as China wants to focus on the quality rather than quantity of investment – it will be interesting to see the impact of the changes. The FT notes that the Chinese banks will be big winners, while other Chinese firms will no longer be able to “round-trip” their money via Hong Kong and other off-shore locations in order to benefit from being “foreign” invested. As previously noted, a balance to some of the benefits in the new tax regime, may be found in proposed measures to demand dividend payments from state companies.

Of course tax rules can result in a lot of “innovative” accounting, and China is a place where there is still a lot of “innovation” (not to mention negotiation) on tax issues. For foreign companies that have already been accused of avoiding billions of dollars in taxes, care should be taken to ensure that transition to the new rules is managed with care.

As for future foreign investment? Expect more of the same. The market still offers plenty of opportunity.

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