Foreign, Chinese firms' tax burdens unified

Starting today, two extra charges will be levied on internationals

BEIJING - China is levying two taxes on foreign companies, marking the beginning of a standard national tax treatment for foreign and Chinese enterprises.

China will charge foreign firms with operations here two additional taxes (a construction tax and education surcharge) in a measure taking effect Wednesday, according to a State Council announcement in late November.

The measure makes most of the taxes imposed on domestic and international companies equal. But it also means foreign enterprises' expenditures on local operations will rise by up to 10 percent.

Analysts said the effect on foreign investors is limited, and they must adapt to the new situations in China and regard it as a market rather than just a low-cost production center.

"I don't think this will exert any negative effect on the growth of foreign direct investment (FDI) in China, given China's robust economic growth and increasing domestic consumption, which will steadily help the market maintain its appeal to foreign businesses," said Wang Zhile, director of the research center on multinationals under the Ministry of Commerce.

Ding Yifan, economist of the State Council's Development Research Center, agreed with Wang and said that in addition to tax policies, many other factors - including consumption-market size, labor resources and economic growth - could determine a nation's attraction as an investment destination.

"The measure itself will help to create a fair tax environment for companies at home and abroad," he said.

Early on in its reform and opening to foreign enterprise, China launched super-preferential tax policies for international companies in a bid to propel its economic growth, and the internationals were exempt from some taxes. Over the past few years, the preferential policies have gradually been phased out.

According to the Ministry of Commerce, China's FDI grew from January to October by 16 percent from a year earlier, and October is the 15th consecutive month that the FDI registered positive growth since the start of the financial crisis.

The European Chamber of Commerce in China said that foreign companies are gradually being treated the same as their local counterparts, sending a strong signal that China's investment environment and policies are maturing, and that European companies have been well prepared for the change. "We have no reason to complain about the additional taxes," said a chamber staff who declined to be named.

"But we will be paying close attention to how China will continue opening to foreign businesses in the future," the person said.

The European Chamber of Commerce in China released a confidence survey in June, revealing that 70 percent of its member companies believe China will be among their top three investment destinations in five years.

The new tax measure comes after China's investment environment was widely criticized by foreign businesses in recent months. Their complaints partially led to China calling off super-preferential policies during the past few years.

In 2007, China unified the corporate income tax on domestic and foreign companies at 25 percent. Previously, foreign firms paid a 15 percent corporate income tax rate, 18 percentage points lower than their Chinese counterparts. The move was a turning point in the super-preferential policies that internationals enjoyed for about two decades.

In April, China launched a new FDI guideline in which the government encourages foreign companies to invest in the service and high-tech sectors instead of manufacturing, and to invest in China's central and western regions.

"It's understandable that they need time to adapt to the changes, but China also has reason to adjust investment policies to support the economic-development mode," Wang said.

Premier Wen Jiabao has repeatedly confirmed that China welcomes foreign enterprises and will treat them as it does domestic companies.

Wang Zhile said China moving toward patiently listening to mutinational companies (MNCs) and it should continue to take advice from them and try to create a more open environment for them, because foreign enterprises are a significant growth engine for China's economy.

Since August, China's FDI growth has remained in the single digit, in contrast to double-digit rates as high as 30 percent in the first half of this year, raising concern about whether high-level growth is sustainable.

Hao Hongmei, a researcher at the foreign investment department of the Chinese Academy of International Trade and Economic Cooperation, a division of the Ministry of Commerce, said China has outperformed others in absorbing FDI and there is no doubt that FDI will continue to grow in the coming years.

"But thanks to the global economic downturn and the nation's transforming economic-development mode, China's FDI growth will probably be moderate and might even decelerate somewhat," he said.

The Philippines-based SM, that nation's largest retailer, plans to invest more than $1 billion in China's second-tier cities in the next five years to establish super shopping malls. Bosch, Germany's leading industrial group, also said China will be given priority when it comes to investment overseas.

The Swedish construction equipment provider Volvo Group is planning to invest more than $100 million in emerging markets, with most of it going to China.

"The company's business in Asia has doubled this year, with China acting as the pillar contributor," said Olof Persson, president and chief executive of Volvo Construction Equipment.

China's economy has grown more than 9 percent in the past five quarters ending in September as the government stimulus paid off. The International Monetary Fund predicts China will expand by 9.6 percent in 2011, four times the pace of the United States and six times that of the euro area.

China outperformed Japan as the world's second-largest economy for the second straight quarter in the three months ending in September.

A report released by the United Nations Conference on Trade and Development in September shows that China continues to be the world's most attractive FDI destination.

Li Fangfang and Zhou Siyu contributed to this story.

China Daily

(China Daily 12/01/2010 page13)