Mixed feelings over China's
new tax system By Olivia Chung
HONG KONG - Under a law passed by the
annual session of the National People's Congress
last week, China's long-awaited unification of
corporate income tax will come into effect next
January 1.
Under the Corporate Income Tax
Law, the unified corporate income tax for both
domestic and foreign companies is 25%. That means
overseas firms will have to pay more than they do
now while domestic companies pay less.
At
present, foreign investors in China's special
economic zones
(SEZs), development zones or
industrial parks, particularly those in the
manufacturing industry, enjoy favorable taxation
rates and tax incentives, paying income tax at
rates as low as 10%. Foreign-invested businesses
outside such special places, and especially those
in retail sales, finance and other services,
normally have to pay higher income tax up to the
standard rate of 33%. Domestic businesses normally
pay a standard 33% income-tax rate.
Therefore, domestic companies generally
hail the new law, as it will help boost their
profitability. But overseas investors have mixed
feelings.
The government began to mull
unifying corporate income tax almost a decade ago,
so many foreign manufacturers on the mainland,
including those from Hong Kong, seem to be well
prepared for the possible impact of the new law,
which will see them paying more tax.
Moreover, despite the tax hike, China,
with its growing market and abundant human
resources, may remain a major attraction to
foreign investment. The fairer and simpler tax
system is attractive to foreign companies
operating in the country.
Yue Yuen
Industrial (Holdings), the world's largest maker
of branded sports shoes, including Nike, which has
factories in China, Vietnam and Indonesia, now
enjoys an average tax rate of only 2%.
An
official for the company, which has four plants in
Guangdong province in southern China, employing
more than 130,000 people, said it's still hard to
figure out the possible impact of the new law.
"We can't tell what impact will be put
upon us until the authorities have announced all
the law details," expected to come out by the end
of this year, said the official, who asked not to
be named.
But he said abundant human
resources, good infrastructure and a huge market
are also important factors making it desirable for
them to increase their investment in China. The
company is now considering setting up a new plant
in inland China.
Danny Po, partner at
global advisory firm PricewaterhouseCoopers, said
Hong Kong services, such as professional and
financial, will benefit from the new law.
"As the law is aimed at improving its
industrial development by encouraging the services
while discouraging the manufacturing sector, the
most affected by the law will be the
manufacturers, particularly those small and
medium-sized enterprises, while the service
industry, such as consultancy firms, financial
service firms and retailers, will benefit from
it," he said.
"But some manufactures now
may rush to the mainland to set up their factories
before the law comes into effect."
Although the new law will strip away the
two-year full tax exemption and three-year partial
tax exemption for foreign manufacturers,
enterprises currently enjoying low tax rates will
continue to have the privilege for a five-year
grace period.
"Besides, some manufacturers
might increase investment in research and
development, in a bid to turn themselves into high
technology or environmental protection firms to
compete for the new privileges under the new law,"
Po said.
Under the new law, the 15% tax
rate will be applicable to enterprises in the
agricultural, environmental-protection,
energy-saving and high-tech industries. But he
warned that some companies are trying to use
"transfer pricing" to get the privileges of a 20%
tax rate, which applies to low-profit firms under
the new law.
"Apart from the changes of
tax rates, strengthening the implementation of tax
law is another main goal of the tax reform, so
manufacturers have to be careful in dealing with
their accounts," Po said.
Mak Ho-nan,
manager of Xinde Electronic in Shenzhen, employing
about 350 people, said the firm is looking at the
possibility of moving its plant to central China.
"Besides the tax increase, increasing
labor costs, stricter environmental-protection
rules and the yuan appreciation have become a
headache for small and medium enterprises [SMEs]
in recent years. Central or western China seems to
be a solution to our problems," he said.
The new tax law also stipulates continuing
tax breaks for foreign investment in the vast but
economically backward western regions, where
unemployment is high.
Joseph Liu of China
Concord Ltd, a health-care operator in Hong Kong,
has different views on the prospects in China
after the unification of corporate income-tax
rates, saying the higher tax burden compared with
Hong Kong will be easily offset by the profits
earned in China.
"The company is planning
to set up a clinic with four doctors in shopping
and entertainment areas in Guangzhou by the end of
this year," said Liu.
"When you see the
Chinese government is going to spend 31 billion
yuan [US$4 billion] on health care this year, and
the number of fake-drug cases [that have come to
light], as well as how poor the existing health
care in China is, you know the demand for health
care is unprecedented and so are the profits," he
said.
According to his estimates, the
profits not only come from clinic fees, but also
comprehensive checkups, including blood tests,
X-rays and medical imaging services, etc.
"We believe Hong Kong's health-care
operation is a promising business in China, given
its world-class medical service," he said. Man
Law, head of the Greater China division of Conpak
Cpa Ltd, which offers corporate registration and
one-stop business service in China, said it is
going to open new offices in Shanghai and Beijing
in the future.
"The tax rate, to be
reduced to 25% from 33%, has a positive impact on
our expansion plan, and the most important is the
cities like Shanghai that have many foreign
companies, which are our target customers, and the
demand for business service there has been very
strong," Law said.
Although the impact of
the tax reform will vary depending on the type of
industry and its location, it will definitely
affect the privileged status and competitive
advantages long enjoyed by SEZs in China.
Chan Yan-chong, director of the master of
business administration program at City University
of Hong Kong, said the passage of the new law has
signified the end of the historical mission of
SEZs.
"To attract foreign investment to
help develop underdeveloped China more than 25
years ago, the favorable taxation terms offered at
that time were necessary. Now that the Chinese
economy is rising by about 10% a year and the
country's tax revenue is growing at a double-digit
rate, the time to change the old tax system is
ripe. But once the comparatively low tax rates
offered by SEZs are scrapped, their mission of
opening up the country to the outside world has
been completed," he said.
However, Chan
said the scrapping of favorable treatment for
foreign investors in the SEZs will have a positive
impact on the relationship between Shenzhen and
its closest neighbor, Hong Kong.
"Shenzhen, after being stripped off the
privileges it offers now, will be in danger of
marginalization, so it's high time for the city to
get closer to its neighbor to perform
complementary roles, which will be good for both
cities," he said.
Beijing designated four
SEZs to offer preferential policies to advance its
market-oriented reforms in 1980. They were
Shenzhen, Xiamen, Shantou and Zhuhai. It
designated Pudong in Shanghai an SEZ in 1990.
Olivia Chung is a senior Asia
Times Online reporter.
(Copyright 2007
Asia Times Online Ltd. All rights reserved. Please
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