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An employee of the Industrial and Commercial Bank of China Ltd (ICBC) counts money at one of the bank's branches at the Shanghai Free Trade Zone in Pudong district, in Shanghai on September 24, 2014. Photo: Reuters

China cuts taxes, simplifies code to kick start a stalling economy, stem capital flight to America

China’s top tax rate of 45 per cent, and its myriad of fees and tariffs had been blamed for driving home grown companies to set up shop overseas

China’s government will cut taxes on companies and individuals to kick start growth in a stalling economy, and match the biggest reform in the US tax code in three decades to help stem any capital flight to America.

The government will forego as much as 800 billion yuan (US$126 billion) in tax income this year, equivalent to 5.2 per cent of 2018 receipts and 5.5 per cent of last year’s revenue, to help the economy transform and upgrade, as well as “activate the market and boost people’s creativity,” Premier Li Keqiang said during his annual work report on Monday.

“We will further alleviate companies’ tax burdens,” Li said to an audience of 5,000 attendees of China’s legislative bodies in the capital. “We will also reduce companies’ non-tax burdens by clearing up administrative fees and charges.”

The latest cuts are an extension of China’s tax reforms since 2013, when the government alleviated more than 3 trillion yuan in taxes and fees on companies, a process Li cited as vital to improve the country’s competitiveness and protect entrepreneurship.

China’s 2017 total tax revenue increased 10.7 per cent to 14.4 trillion yuan, resuming double-digit growth for the first time in five years, according to the Finance Ministry’s data. Tax revenue from individuals grew by 18.6 per cent to 1.2 trillion yuan.

SCMP Graphics
China’s progressive income tax system for individuals has seven brackets with rates ranging from 3 per cent to 45 per cent of income. The threshold for taxable income has been raised three times since 2006, matching the 9 per cent per annum average economic growth rate over the period, from 1,600 yuan in 2006 to 2,000 yuan in 2008 and 3,500 yuan in 2011.

That’s not enough for disposal income to catch up with rising living costs, said New Hope Group’s chairman Liu Yonghao, an adviser to the Chinese People’s Political Consultative Conference, as the legislature’s advisory body is called. The threshold should be raised to around 10,000 yuan, he said.

To make up for the difference, the government will allow deductions on children’s education costs and severe illnesses. Further changes are needed because the current 3,500-yuan taxable threshold had remained unchanged since 2011, lagging behind the country’s inflation rate, said EY’s partner Freeman Bu.

“It will not only benefit individuals but do good to companies, by alleviating their pressure to increase salary in the talent hunt and for existing employees,” Bu said, adding that the deductions could pave the way for a shift to a family-based tax system.

Chinese Premier Li Keqiang at the opening of the First Session of the 13th National People's Congress (NPC) at the Great Hall of the People in Beijing on March 5, 2018. Photo: SCMP/Simon Song
China’s top corporate tax rate has also been the subject of complaints among private entrepreneurs, driving such home grown companies as Fuyao Glass Industry Group to open the world’s biggest assembly for automotive glass in Ohio, far from its headquarters in Fuqing, Fujian province. Taiwan’s Foxconn Technology, the world’s largest contract manufacturer of consumer electronics, is setting up a US$10 billion assembly plant ion Wisconsin to take advantage of the generous tax breaks in the American state.

Hangzhou Wahaha Group had to pay more than 500 different kinds of taxes, tariffs and fees every year, the founder of one of China’s largest beverages bottlers said at the end of 2016.

China’s government should take US tax cuts “into account when it designs and implements its tax reform in order to maintain its competitiveness,” Bu said.

To keep up, China will simplify the country’s value-added taxes from to two from three, with an aim to trim the import levies for manufacturing and the transport industries.

“The current 17 per cent value-added tax rate on manufacturing makes China less competitive, considering that the level stays less than 13 per cent in major neighbouring territories like Singapore, India and South Korea,” said PwC’s China corporate tax partner Robert Li.

Donald Trump’s tax cuts, the biggest in three decades in the US, put pressure on China’s government to keep up to stem capital flight, not least among the hundreds of American companies from General Motors to Wal-Mart Stores Inc that operate businesses - and retain earnings - in China, analysts said.

“It’s a positive move as the government realises that private companies should be protected in order to drive China’s economic development,” said New Oriental Education’s founder Yu Minhong.

This article appeared in the South China Morning Post print edition as: Taxes cut in attempt to rev up stalled economy and stem capital flight to US