China Changes Tax Treatment of Foreign Owned Firms

From the Asia Times:

As of January 1, Sino-foreign joint ventures and wholly foreign-owned firms are no longer exempt from paying land-use tax. Also, later this year a new corporate income tax structure is expected to be passed and implemented that will see foreign and domestic firms taxed at the same rate, ending years of special corporate tax breaks for overseas firms.

The land-use or property-tax rate will now apply equally to both local and foreign developers and will triple the old rate set in 1988.

In large cities the annual property tax rate will range from 1.5 yuan to 30 yuan (19 US cents to $3.85) per square meter depending on its location and type of use. In medium-sized cities the rate will range from 1.2 yuan to 24 yuan per square meter, in small cities the rate will vary from 0.9 to 18 yuan and counties, townships and mining areas property will be taxed at a rate of between 0.6 yuan to 12 yuan per square meter per year.

This first revision of land-use tax regulations since 1988 is aimed at bringing better control and better planning to the development and redevelopment of land, according to sources with the Legislative Affairs Office of the State Council, China's cabinet.

........... The new regulations will also bring to an end the unfair treatment of domestic companies, which have had to pay taxes and fees from which overseas firms have been exempted for nearly two decades, they said.

............Low land-use costs and tax exemptions have been the major tools China has used to open its economy to foreign investment since the late 1970s.

Late last month, China's top legislature began discussing a new law on corporate income tax that is likely to result in a unified tax rate of 25% for both domestic and foreign companies. If the law is approved, foreign firms are likely to lose a major tax advantage.

Despite a stated corporate tax rate of 33%, foreign firms often benefit from tax waivers, credits and incentives that bring their tax rate down to an average of 15%. Domestic companies on average are taxed at a rate of 24%.


Domestic Chinese firms are delighted at this development as it means they compete with foreign-owned firms on a level playing field for the first time. This also benefits the Chinese government which will gain extra tax revenue which they can re-direct to China's impovershished interior.

However, foreign firms (which are mainly American, though Britain, France and Germany have a presence in China) will feel the pinch. Most will have sunk too much money into their Chinese operations to simply up and go elsewhere (and in any case the Chinese move allows other similar low-cost countries to also increase their taxes in line). Firms like Wal-Mart, which have substantial interests in China will be tempted to pass their costs on to the American consumer, making things even more difficult for the Fed, which is contending with inflation combined with a slowing US economy.

The big question of 2007 is how the US economy will fare: will they have a soft landing or go into recession? And how will their slow-down affect the rest of the world? Will the world economy decouple from America's for the first time since WW1, or will the world economy do the usual thing and slow as America slows.