No More tax breaks for foreigners in China

China ended almost 30 years of favourable treatment for foreign companies on Thursday with the introduction of a measure to equalise corporate tax rates paid by local and overseas enterprises. See original Article

The law, introduced at the National People’s Congress, will immediately benefit Chinese companies, which have long complained about discrimination in favour of foreigners.

It will see a single tax rate of 25 per cent levied on all companies. Under the current system,
Chinese companies have been taxed at up to 33 per cent while foreign enterprises have paid as little as 15 per cent.

Jin Renqing, the finance minister, said the law would end the big disparities between nominal and effective rates of tax. “If different tax policies continued for domestic and foreign-funded enterprises, the former would definitely be put at a competitive disadvantage and the establishment of a unified market with standard and fair competition would be obstructed,” he said. “Domestic enterprises have strongly called for unifying taxation treatment.”

The biggest winners will be China’s large state banks, according to JPMorgan, because income and revenue tax – the last of which only banks have to pay – now eat up almost 50
per cent of their pre-tax profit.

Jing Ulrich, JPMorgan managing director and China equities chair, said she expected the 5 per
cent revenue tax to be gradually phased out. “What the banks will experience is a double whammy in a positive way,” Ms Ulrich said. “They will see their income tax reduced and they will also see their revenue tax reduced.”

Chinese private companies, which have long been the lowest of the government’s priorities after the state sector and foreign investors, despite their growing clout, should also benefit.

The law, which will be applied from the start of next year, also targets local companies that move money out of and back in to Chinato earn a tax break.

The bill enacting the changes may not affect foreign companies already operating in China fully for up to five years.

Because of the way it is being phased in, China will also continue to offer concessional tax rates to “low-profit enterprises” and to investors offering high-tech projects, Mr Jin said.

The tax bill of China Construction Bank, one of the top three lenders, will fall substantially, said Guo Shuqing, the chairman.

“Roughly, based on the taxes we paid last year, we will pay about one quarter less tax when the rate is reduced to 25 per cent from 33 per cent,” Mr Guo said.

JPMorgan estimates that every 1 per cent cut in income tax will lift the banks’
fair value by 3 per cent, while every 1 per cent cut in revenue tax will raise fair value by 7 per cent.

Mr Jin said that by the end of 2006, 594,000 foreign-funded enterprises had been approved for a total $691.9bn in investments since China launched its special economic zones in 1980.