Rise adds to costs also driven higher by new labour law
Foreign companies in mainland coastal regions will greet the new year with a three percentage point rise in income tax to 18 per cent - an unexpectedly high increase that will deal yet another blow to tens of thousands of manufacturers.
As a core part of a sweeping overhaul of the mainland's tax regime, the central government revealed over the weekend that the new tax rate would be raised progressively by two percentage points in 2009, 2010 and 2011 to 25 per cent in 2012, while mainland incorporated firms will have their tax lowered from 33 per cent to the same level in 2012.
Many tax experts said that the four-year transition was shorter than expected and a bigger tax bill would add to the woes of some 60,000 Hong Kong factory owners operating across the border that have already suffered shrinking profitability as a result of higher costs for labour, raw materials, electricity and land, as well as an appreciating yuan.
However, companies in hi-tech developments in five special economic zones - Hainan, Shantou, Shenzhen, Xiamen and Zhuhai - and Pudong New Area in Shanghai will be offered two-year tax holidays and half of the 25 per cent tax rate for the following three years.
'The new rate will begin at a harsher than expected level, and will jump to 25 per cent within four years instead of five years, which will increase costs and make the livelihoods of Hong Kong manufacturers even more difficult,' said KPMG tax partner Bolivia Cheung in Guangzhou yesterday.