China’s finance ministry and the country’s top tax body announced late on Tuesday that domestic companies repatriating overseas profits would be allowed more leeway to deduct taxes paid abroad from their taxable incomes. On December 28, Beijing temporarily exempted foreign investors from being taxed on profits from Chinese investments provided these proceeds were reinvested in industries high on the government’s priority list. The new measure, effectively Beijing’s second tax break in a week, puts in place a system that encourages foreign funds to remain in the country and makes repatriation attractive for Chinese companies. “The two steps mean China has gone all out to strengthen its tax competitiveness in the global arena,” said Andrew Choy, the international tax leader for Greater China at EY. “The latest notice comes as such an important step that it completes a tax regime that encourages Chinese capital to repatriate home, on top of the tax break that discourages foreign capital to flow out of the country.” ‘China must focus on innovation in manufacturing as wages rise’ Both tax breaks have been made effective retrospectively from January 1, 2017, as ministries implement policies stipulated by China’s State Council in its August guidance, which sets the direction for the country’s tax code. The backdated period – longer than many expected – signals China’s determination to gain an edge in global competitiveness, especially at a time when the United States, the world’s largest economy, has introduced its biggest tax reform in three decades. “The tax breaks will counter the Trump Administration’s tax cuts, for sure,” said Choy. The US overhaul will cut the top corporate tax rate to 21 per cent from 35 per cent, and move the country towards a territorial tax system to encourage American companies to bring their offshore profits home. Trump’s tax cut plan poses a new threat to China The new measure covers eligible overseas affiliates of Chinese companies, and it gives these companies the option to calculate their deductible taxes comprehensively – instead of determining deductible amounts country by country – so that they can maximise their deductible amount globally. The measure also eases concerns over double taxation raised by domestic companies, which highlighted the non-competitiveness of the old regime to the tax authorities at a time when more Chinese companies are seeking to participate in the Belt and Road Initiative, said market watchers. What does Trump’s tax plan mean for China? Multinationals have already been advised to closely assess their investments in China, so they can fully benefit from the tax break aimed at them. Foreign investors are eligible for a tax break if profits are reinvested into sectors Beijing considers important, including advanced manufacturing and services sectors, said Robert Li, a PwC tax partner in Shanghai. This policy will also help China implement its “Made-in-China 2025” strategy. Profits repatriated by foreign investors attract a tax rate of 10 per cent, and multinationals that do not have any plans to reinvest in China can choose to leave their earnings in their domestic books for longer. “The policy itself and the signal it sends are both worth our attention,” said Li. “The policy encourages foreign companies to make investments in various ways, including setting up of new companies, and increasing the capital reserves of existing companies and acquisitions.” EY’s Choy said foreign investors would not need to establish a new company for tax purposes only – keeping their Chinese earnings in the country would also have the same effect as exemption from taxation. PwC’s Li said tax implications could help foreign investors decide on how to invest in their China operations.