China Law Blog

Jason Subler of Reuters just came out with a very good article, entitled, "China tax law to be double-edged sword for firms," discussing likely impacts of a China's moving to a unified corporate tax system.  It is widely expected China's People's Congress will soon unify China's corporate tax rate at around 25 percent for both foreign and domestic companies.  Domestic firms now pay around 33 percent and foreign firms 15 percent.  There is expected to be a five year grace period before the rates actually change.

The article notes that this unification of rates will not be all bad for foreign companies because it will, among other things, "help China restructure its economy and prompt it to modernize its bureaucracy" and lead to increased tax incentives for particular industries:

"This new tax law is timely, and I think China is looking at it in parallel with the overall direction of where it would like to see the country headed," said Anthony Fay, a tax lawyer with White & Case in Beijing.

Fay and other analysts said that, while the new law would scrap preferential tax rates for foreign firms that invest in particular areas such as economic development zones, it could introduce new ones for all companies in specific sectors such as high tech and environmental protection technology

That would not only cushion the blow for foreign firms, but also help China steer its industry up the value chain and tackle its environmental problems, said Minggao Shen, an economist with Citigroup in Beijing.

There is also talk the new tax laws will include "fresh tax breaks" for investments in China's less developed central and western regions.

Perhaps most importantly, many think these new laws will benefit foreign companies by leading to substantially increased enforcement of tax collections against China's domestic companies.  China is likely to feel some pressure to enforce these tax laws equally between domestic and foreign companies so as to comply with world trade body standards.

There is also a sense that "foreign companies, asked to play by the same tax rules as Chinese ones, might also start to take a closer look at rules that put more restrictions on them than their local competitors:"

"That may raise some issues," Fay said, mentioning the higher registered capital foreign companies have to put up, as well as limits on the debt they can assume, as potential examples.`

Ian Stones of Four Seas Investment Consultants in Beijing does not see this tax change as a "primary driver" of decisions on whether to invest in China:

"You've just got very good, efficient infrastructure here and a big market. So the fundamentals are pretty obvious -- the tax issue is not a primary driver," Stones said.

Because the current preferential rates are largely aimed at manufacturers, the new rates will have less impact on foreign companies in "the real estate, trading and service sectors."

I think this article and its commentators are right on as I too think the new tax rates will have little overall impact on foreign companies in China.  I also think that if there is indeed a five year grace period, much can happen in the meantime.