China fails to collect 65pc of corporate taxation, says IMF

Mainland's high rate blamed for low corporate income tax efficiency, while HK's low levels fuel outsized foreign direct investment

PUBLISHED : Friday, 27 June, 2014, 1:04am
UPDATED : Friday, 27 June, 2014, 1:04am

The mainland is one of the worst jurisdictions in the world when it comes to collecting corporate taxes, while Hong Kong's low tax rate has enabled it to attract foreign direct investment (FDI) far out of proportion to the size of its economy, according to a report by the International Monetary Fund (IMF).

Among 46 economies, the IMF said the mainland was the 11th worst in "corporate income tax efficiency" measures from 2011 to 2012. Corporate income tax efficiency is defined as actual tax revenue compared to the potential tax revenue that could have been collected, given the tax base and tax rate.

The mainland's corporate income tax efficiency was roughly 35 per cent, meaning it failed to collect 65 per cent of corporate taxes, according to the IMF. A major reason was its high tax rate, which encouraged companies to shift their profits abroad, the IMF said.

Toine Knipping, chief executive of Amicorp, an international trust company, said it was estimated that nearly US$2 trillion of mainland money was abroad. "A significant percentage of that is not declared to the Chinese government," he said.

The average corporate income tax efficiency among the 46 economies was 43 per cent.

Among the 46, Estonia had the lowest corporate income tax efficiency at 20 per cent, while Cyprus had the highest at 213 per cent. Cyprus is widely used as a European offshore haven to receive large amounts of foreign funds. Ireland had the second highest corporate income tax efficiency at roughly 75 per cent, and Luxembourg the third highest at around 65 per cent.

Britain, the US, Switzerland and South Korea had corporate income tax efficiency rates of about 50 per cent.

"Our work in developing countries frequently encounters large revenue losses through gaps and weaknesses in the international tax regime," said Michael Keen, deputy director of the IMF's fiscal affairs department.

Separately, Hong Kong ranked fourth globally in FDI stock in 2012 as a percentage of gross domestic product - standing at 409 per cent - according to the IMF report. Luxembourg was top with an FDI stock to GDP ratio of 4,710 per cent, followed by Mauritius at 2,504 per cent.

There was substantial evidence that tax considerations significantly affected FDI, the report said. Some studies suggested a 10 percentage point decrease in a jurisdiction's tax rate increased its FDI stock by more than 30 per cent in the long run.

Hong Kong was the biggest source of FDI into the mainland, accounting for 46 per cent in 2012, followed by the British Virgin Islands (BVI) at 15 per cent, the IMF said. Both Hong Kong and BVI have lower tax rates than the mainland.

"Taxation plays a key role in shaping the structure of international capital flows: jurisdictions known for attractive tax regimes and extensive treaty networks commonly feature prominently as conduits through which investments pass," the IMF said.