Unified Taxes Are Only Part of the Story

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The long-running debate on unified taxation for domestic and foreign companies in China is expected to be officially reviewed in March, and the new tax rate could be introduced in early 2008, according to a report in Forbes, quoting a Ministry of Finance official. The rate would be 25 percent, compared to current rates of 15 percent and 33 percent for foreign and domestic companies respectively. A five-year period of adjustment is planned.

The article notes that some exceptions can be expected (as usual), and that “state-supported high-tech companies will be entitled to 15 pct income tax”. It is also noted that domestic banks will benefit from the change, and that this is likely to boost their share prices (and it would be no surprise to find that policy seeks to ensure successful market performance for these high-profile, and strategically important, institutions).
But profits tax is not the only tax in the news. Business Standard reported that, from January 1st this year, foreign-invested companies are no longer exempted from paying land-use tax, and that charges for all users will also rise.

    “In large cities the annual property tax rate will range from 1.5 yuan to 30 yuan (local currency) per square meter depending on its location and type of use. In medium sized cities the rate will range from 1.2 yuan to 24 yuan per square meter, in small cities the rate will vary from 0.9 to 18 yuan and counties, townships and mining areas property will be taxed at a rate of between 0.6 yuan to 12 yuan per square meter per year.

The change, the first since 1988, is said to be part of a policy to control land development – but can also be seen as another swipe at foreign investors (or, from a different perspective, a levelling of the playing field for local firms).

The whole issue of China’s attitude to foreign investment (a positive catalyst for development vs. a negative form of economic colonialism) has been under review for some time (as reported here), and the resulting changes are popping up in all sorts of policies, such as the draft Anti-Monopoly Law, development of home-grown “national champions” in key sectors, and revisions to M&A policy that requires (as reported in Forbes) the National Development & Reform Commission (NDRC) to introduce:

    “[a] special mechanism to review the mergers and acquisitions involving foreign investment in strategic and sensitive industries…[the NDRC will] compile a list of strategic and sensitive sectors in a bid to protect the country’s economic security.”

Carlyle and others have already felt the impact of such scrutiny. A report in the FT adds that, under the revised M&A rules:

    “Foreign acquirers and their Chinese targets are also required to disclose more information on relationships between the parties involved and the basis for determining the purchase price…While no change or further elaboration has been made to the original anti-trust filing provisions – largely because the long-awaited anti-trust law is still being debated – new criteria for barring foreign acquisitions in the name of protecting key industries, national economic security, famous trademarks and famous Chinese trade names have been introduced in addition to the existing market concentration and anti-competition rules.”

And it is not just in the news that these stories are bubbling away. The same message is repeated again and again by officials, and in a recent conversation with a former trade minister it was made very clear to me that there are heightened sensitivities at a very senior level in relation to this issue.

It is impossible to say how far these policy moves will go, but it is certain that MNCs, private equity firms, and anyone operating in (broadly defined) sensitive sectors, would be wise to do their planning with a strategic sensitivity equal to that of those doing the regulating.

See news sources:

    China says new corporate tax law will not have big impact on …
    Forbes – NY,USA
    BEIJING (AFX) – China’s new corporate income tax draft law, set to be reviewed by the country’s parliament in March, will not have a significant impact on …

    China withdraws sops offered to MNCs
    Business Standard – India
    After emerging as the “world’s factory”, China has withdrawn investor-friendly sops and policies it offered since 1970s to woo Fortune 500 companies to set up …

    China to set up special M&A review mechanism for foreign …
    Forbes – NY,USA
    BEIJING (XFN-ASIA) – China will set up special mechanism to review the mergers and acquisitions involving foreign investment in strategic and sensitive …

    M&A makeover
    Legal View: M&A makeover makes good sense
    By Kenneth Chan
    Published: December 19 2006 16:17 | Last updated: December 19 2006 16:17

One Response to “Unified Taxes Are Only Part of the Story”

  1. Archive » No More Tax Breaks| China Business Blog Says:

    […] ises 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 deliberat […]

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