China's long-standing favourable tax treatment for foreign companies
is to be gradually phased out. However, the Chinese finance minister
Jin Renqing said today that he does not expect the change to affect levels of foreign investment,
While the move will affect all western businesses, raising the total
annual tax bill for foreign investors by about 43bn yuan, the blow will
fall hardest on recent arrivals in China and even more so on those that
have yet to take the plunge, as they will not have enjoyed the benefits
of more than two decades of tax breaks to cushion the blow.
The shake-up will end China's blatantly discriminatory two-tier tax
system in which Chinese companies pay 33% tax while foreign companies
pay an average of 15%. Over five years, the rates will be unified at
25%, although there will still be specific tax breaks available to
encourage energy conversation and hi-tech development — eligible firms
will pay a 15% tax rate.
The draft tax bill, unveiled by the minister, gives special
consideration to Taiwan, Hong Kong and Macao-funded companies. Because
they are mostly small in size, they can benefit from a 20% tax rate.
Interestingly, Jin also talked about introducing a carbon tax, and
tax breaks to encourage the development of renewable energy sources.
Taken together, the moves show how China's tax system is evolving
along the lines of much more mature western economies, and while some
western businesses, particularly those in low-margin manufacturing, may
shed a tear at the loss of the tax breaks, we don't see it changing the
fundamentally favourable climate for FDI in China.