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.
