China’s new tax rules will reap as much as an extra 43 billion yuan ($5.5 billion) a year from foreign companies, Finance Minister Jin Renqing said today.
Higher corporate taxes for foreign businesses and lower rates for local companies start Jan. 1, with the implementation to be phased in over five years, Jin said at a press briefing in Beijing. The unified rate will be 25 percent.
The Chinese government wants local companies to compete on equal terms with foreign rivals as the world’s fourth-largest economy opens its markets after joining the World Trade Organization in 2001. Royal Dutch Shell Plc., Europe’s biggest oil company, and Sony Corp., the world’s second-biggest consumer electronics maker, are studying the tax changes.
“We are paying close attention to this tax adjustment and will review the relevant documents before taking an appropriate course of action,” said Liu Xiaowei, a Shell external affairs director. “The decision isn’t a bolt out of the blue; it’s a long time coming,” Liu said in Beijing.
The existing rates are 15 percent for overseas companies and 33 percent for local businesses. The National People’s Congress is to pass the new law at its annual meeting, taking place in China’s capital.
Some technology companies and small businesses will pay lower rates than the unified tax.
“We are observing the discussions and will study and implement the final regulations, but it is too early now to comment on what impact it may have,” Shinji Obana, a Shanghai- based spokesman for Sony said by telephone.
The five-year grace period means foreign companies’ tax bills may jump by about 8 billion yuan each year, Jin said. China’s 594,000 foreign-invested companies paid 795 billion yuan last year, or 21 percent of total tax revenue, he said.
China assessed a lower rate for foreign companies than domestic businesses in the 1980s, when it was seeking to attract money from overseas. Now, the world’s fastest-growing economy is trying to rein in investment to prevent accelerating inflation, asset bubbles and spending on factories that won’t be needed if growth slows.
In a speech yesterday, Jin said the tax changes won’t affect foreign investment significantly because China retains attractions including healthy economic growth, a vast market, ample workers and an “improving legal environment”. China is home to 1.3 billion people and its economy last year expanded 10.7 percent, the fastest pace in 11 years.
Tax revenue lost from local companies will more than offset the extra money paid by foreign businesses, and may lead to a total cost to the government of 100 billion yuan a year, Jin told reporters today.
“Tax revenue growth has remained strong over the past 10 years, backed by economic expansion, which enables us to increase spending on the public sector as well as pushing ahead with the income tax reform,” Jin said.
Many Chinese companies have already secured lower tax rates under existing exemptions, said Yang Zhiyong, a finance researcher at the government-backed Chinese Academy of Social Sciences.
China aims to collect 4.4 trillion yuan of revenue in 2007, 14 percent more than last year. Spending may rise 16 percent to 4.65 trillion yuan, according to Jin’s work report this week to the congress.
“The process of forming the new tax regulations is still too preliminary to say what that impact may be,” Sharon Zhang, a Beijing-based spokeswoman for Dell Inc., the world’s second- biggest personal-computer maker, said today by telephone.