China has made some of the best improvements to its corporate tax regime in the world but still ranks low in terms of ease of tax payments, according to a report by PricewaterhouseCoopers (PwC) and the World Bank.
In the Asia-Pacific region, China, along with Fiji, Pakistan, Sri Lanka and Timor Leste, are the five countries that have reduced their corporate profit tax rates by more than 10 percentage points in the past nine years, said the report.
China's corporate tax rate was 6.2 per cent last year, but its total business tax rate is 63.7 per cent. In this respect, China has done better than the Asia-Pacific region overall, where the corporate profit tax rate has fallen from roughly 21 per cent in 2004 to around 17.5 per cent last year.
Although Hong Kong's profit tax rate, at 16.5 per cent last year, is higher than the mainland's, Hong Kong's total business tax rate of 22.9 per cent is much lower than China's total, according to the report.
"Obviously, there is an incentive to shift profits from China to Hong Kong due to the discrepancy in rates," said Patrick Yip, deputy tax managing partner of Deloitte Touche Tohmatsu.
The report said: "In China, the state tax authorities and the municipal authorities in Shanghai have been improving their tax systems. Online filing systems were improved to increase the efficiency of tax return preparation and tax payment."
From 2011 to 2012, this has reduced the compliance time by 20 hours to 318 hours, the report added. Hong Kong's tax compliance time is still much lower at 78 hours per year.
Another measure of the ease of tax compliance is the number of tax payments a company makes. With a reduction of 28 payments per year between 2004 and 2012, China had the largest drop in payments in Asia-Pacific, said the report. It now has seven payments per year by a company, the third best in the region, while Hong Kong is the best with three payments and Singapore second with five.
Nonetheless, China ranks a lowly 120 out of 189 economies in terms of ease of tax payments. Hong Kong is fourth, while Singapore is fifth. United Arab Emirates is first, Qatar second and Saudi Arabia third.
On November 15, the central government issued a directive on reform as part of the third plenum.
"The decision, for the first time in many years, identifies taxation as an important pillar of national governance," said a report by the US China Economic and Security Review Commission, a US agency that advises Congress on Sino-US relations.
The government's decision explicitly refers to generating more revenue from personal income, real estate and resource taxes, which would restrain housing prices, redistribute income from wealthy to poorer households, discourage wasteful use of resources and provide local governments with an alternative tax base.
Value-added tax and income tax may be prime candidates for reform to encourage consumption, Yip said.
"Reforming the tax system is essential," said Andrew Packman, leader for tax transparency and total tax contribution at PwC.
"Trends in the international tax environment such as the globalisation of business and the increasing proportion of company assets made up of intangibles such as brand names, software and know-how require tax systems around the world to be updated to meet modern needs."