Donald Trump’s ‘tax war’ could force Beijing to ease corporate burden

The US president’s plan may lack detail but it could put pressure on Beijing to reduce business burdens

PUBLISHED : Thursday, 04 May, 2017, 9:00am
UPDATED : Friday, 05 May, 2017, 6:02am

The erosion of Chinese manufacturing might accelerate if Beijing fails to keep up with business tax cuts in the United States and other developed countries, analysts say.

But observers also cautioned that the central government’s scope to reduce the corporate tax burden would be limited given the need to keep up public spending on infrastructure to make sure growth stayed on track.

US President Donald Trump last week announced a plan to cut his country’s corporate income tax rate from 35 per cent to 15 per cent. The plan lacked detail and needs to be passed by the US Congress.

Nevertheless, the proposal appears to have rattled leaders in China who count on international investors for economic growth.

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People’s Daily, the mouthpiece of the ruling Communist Party, warned on Friday that such a move would “wreak chaos in the international taxation order” and “incite a tax war” as more countries such as Britain and France considered joining the race.

Sun Lijian, deputy dean of Fudan University’s school of economics, said China would not feel a short-term impact if the US cuts went through but its ability to attract foreign capital would be hurt in the long run.

Rising wages and the cancellation of some official incentives have already prompted some foreign-funded firms to leave China. For example, hard drive giant Seagate said earlier this year it was closing its Suzhou factory and laying off about 2,000 workers.

But Nomura International chief China economist Zhao Yang said multinational companies (MNCs) would not relocate their China businesses outright.

“China’s corporate income tax rate is not high and its turnover tax system enables MNCs to pass on the rising costs to downstream consumers,” Zhao said.

The country’s standard corporate income tax rate is 25 per cent, and drops to 15 per cent for government-recognised hi-tech firms. The vast majority of Chinese corporations, however, are burdened by a plethora of official charges – from value-added tax and corporate income tax, to social security contributions and hundreds of local fees.

“China has been cutting taxes and fees overall, but the corporate burden seems heavier after the value-added tax reform,” Bocom International chief strategist Hong Hao said. “The US tax proposal increased the pressure on China [to implement substantial tax cuts].”

In the biggest overhaul of its kind in decades, the Ministry of Finance started making the switch from a business tax to value-added tax from 2011. The central government claimed the change amounted to an accumulated tax cut of 1.2 trillion yuan.

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But while the Trump proposal would let US companies hold on to more of their profits, China’s ongoing structural tax cuts – with increases for some and falls for others – offer little cheer to business owners.

The State Council said VAT reform lowered the corporate burden by 570 billion yuan in last year alone, with more savings to come this year. However fiscal revenue rose 4.5 per cent last year and is projected to rise 3.8 per cent in 2017.

Tang Dajie, secretary general of the China Enterprise Institute, a Beijing-based think tank, said the central government was trying to reduce the already high macro tax burden.

Under the present indirect tax system, Chinese businesses paid about 90 per cent of the total tax revenue, while personal income tax revenue accounted for only 7.7 per cent last year.

The corporate burden – including taxes, pension contributions and fees – was equivalent to 40 per cent of the national gross domestic product, Tang said.

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On top of that there was rising financing and labour costs and the economic slowdown, prompting entrepreneurs to amplify their calls for a greater relief.

“China’s tax system is very complicated and the tax cuts have a long way to go,” he said.

At the same time, China needs more revenue to fund millions of civil servants, pay pensions to 100 million retirees, support public welfare and more importantly finance construction projects to stabilise the economy.

Jia Kang, former head of the Ministry of Finance’s fiscal science institute, said the tax structures and the room for tax cuts were different in each country.

“However, the US tax plan might push China to fully and thoroughly consider fee reductions,” Jia said.