Range of exemptions from investment taxes to end for expats in mainland

'Overdue' changes are part of sweeping reforms to reduce the wealth gap

PUBLISHED : Thursday, 07 February, 2013, 11:11am
UPDATED : Friday, 08 February, 2013, 5:02am

Foreigners on the mainland will no longer enjoy exemptions from a range of investment taxes, under a new tax regime announced this week.

The State Council unveiled sweeping tax reform plans on Tuesday under which three ministries, including the National Development and Reform Commission, proposed 35 measures to make the wealthy pay more and to narrow the income gap between the urban rich and the rural poor.

Included in the plans is a measure to cancel tax exemptions for foreign individuals who obtain dividends and bonuses from foreign-invested enterprises, according to a report in the mainland business magazine, Caixin.

A tax rate of 20 per cent currently applies to dividends and bonuses under the mainland's personal income tax law.

The Ministry of Finance and State Administration of Taxation will begin making changes and modifications to the relevant tax laws and regulations soon.

Liu Tianyong, a tax lawyer, told Caixin that the abolition of tax benefits would be beneficial for investigations into tax-dodging and the battle against international tax avoidance.

"It was an outdated policy conceived during the planned economy period. It should have been abolished a long time ago," Liu said.

It was an outdated policy conceived during the planned economy period. It should have been abolished a long time ago

"Tax breaks are especially unwise given that many foreign investors in China shift profits overseas. The new plan is fairer as it ensures equal treatment of national and foreign investors."

China offered tax incentives and special treatment to foreign enterprises and individuals to attract overseas investment as it introduced economic liberalisation over the past three decades.

Since 2003, the government has begun to standardise tax laws, especially in regard to foreign investors.

The scrapping of tax exemptions for foreigners comes nearly 18 months after expatriate staff on the mainland were controversially required to join its pension system.

The policy - which cost each foreign employee 1,400 yuan (HK$1,700) a year in contributions to mainland pension schemes - drew strong opposition from expatriates and their employers.

Employers will have to pay an additional 4,800 yuan per employee to the pension and medical insurance accounts to comply with the new rule on tax exemptions.

Opaque policymaking and bureaucracy on the mainland have made foreign companies less optimistic about the business outlook in the world's second-largest economy.

According to a survey by the American Chamber of Commerce in Shanghai last year, more than 90 per cent of US firms said higher labour and production costs were holding back their businesses on the mainland.