Banks face loss of China tax perks

PUBLISHED : Friday, 06 October, 1995, 12:00am
UPDATED : Friday, 06 October, 1995, 12:00am

FOREIGN banks will lose their preferential tax treatment gradually over the next few years as China paves the way for them to conduct business in domestic currency, a senior government official says.

Bankers said a removal of the tax privileges - especially the corporate income tax - was not unexpected, but they hoped they would have a wider access to the yuan business later.

They said the removal of the privileges would not drive banks out of the country because of China's strategic importance in global banking strategy.

Foreign banks are now taxed at 15 per cent on their income, unlike their Chinese counterparts which are taxed at 55 per cent.

Chinese banks have argued their higher tax burden makes it tough for them to compete with foreign banks.

Shanghai Securities News yesterday quoted Wu Xiaoling, deputy director of the State Administration of Exchange Control, saying that the tax privileges of foreign banks would be scrapped gradually within the next five years. She said as long as foreign banks continued to enjoy tax breaks, they would not be allowed to carry out the coveted yuan business.

The country would narrow the tax gap between the local and foreign banks, with the ultimate aim of having a unified tax rate.

Miss Wu did not say how the two rates would be unified but some bankers said domestic and foreign banks might be taxed at 33 per cent, the rate at which business enterprises are taxed.

Xue Qingyu, head of Shanghai Pudong Development Bank's Xuhui branch, said: 'There is a suggestion that local and foreign banks be taxed at 33 per cent.' She welcomed the removal of foreign banks' tax privileges in return for the permission for them to conduct yuan business.

'When foreign banks can also do yuan business, it creates competition, which is good for everybody in the long run,' she said.

Foreign bankers were not perturbed by the coming changes, although the details were lacking. Banque Indosuez (Shanghai) general manager Fiepko Klug said: 'China is a country of strategic importance to us and we're committed to be here in the long-term, regardless of the tax changes.' He did not expect China to scrap the privileges within the next two years.

Price Waterhouse partner specialising in Chinese banking regulation, Douglas Watt, said: 'We have about 10 banking clients who are here because of China's global significance, not because of the favourable tax status.

'So, I don't think the tax changes will drive them out of the market.'