China-US relations

Trump tax reform a challenge for China

Beijing may have to create a more attractive business environment for investment, both foreign and domestic, with US move to repatriate profits

PUBLISHED : Saturday, 09 December, 2017, 1:01am
UPDATED : Saturday, 09 December, 2017, 1:01am

Whatever the United States does, the world takes notice. The Republican tax reform, led by the Trump White House, may be driven by purely domestic concerns but US trading partners, particularly China, are paying close attention. For those countries, capital outflow is a major worry. The most significant tax cut in three decades in the US may trigger a global race to slash taxes to compete for capital. This will particularly concern China, where tax income accounts for up to 80 per cent of fiscal revenue. Premier Li Keqiang has already made tax reform part of his policy agenda, with 1 trillion yuan (HK$1.18 trillion) to be slashed from corporate taxes. But the US move will add new pressure on the central government to act.

The two different tax bills that have been passed in the US Senate and House of Representatives still have to be harmonised before President Donald Trump can sign them into law. So it will take some time to gauge the effects of the tax cut on US competitiveness, productivity and workers’ wages and the impact on the global economy. But Chinese policymakers do not have the luxury of time.

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Some large mainland firms have already moved to the US, partly to escape high Chinese taxes. Among these, Fuyao Glass Industry Group has opened the world’s biggest assembly plant for automotive glass in Ohio, far from its old headquarters in Fuqing, Fujian province; and beverages bottler Hangzhou Wahaha Group has been working on a possible takeover of the biggest US milk processor, Dean Foods.

Taiwan’s Foxconn Technology, one of the leading industrial employers on the mainland, is setting up a US$10 billion assembly plant in Wisconsin to take advantage of the state’s generous tax breaks. No wonder the central government is keeping a close watch.

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But it is not yet a cause for alarm. The Trump tax reform reduces corporate taxes from the nominal rate of 35 per cent to 20 per cent. Compared with China where a corporation may pay up to 40 per cent in taxes, a wide tax differential may seem to open up. In reality, most US corporations have been paying no more than 20 per cent in taxes, thanks to many loopholes in the tax code. Also, many Chinese companies prefer to operate in a familiar business and regulatory environment even if it means paying higher taxes.

But one area should concern China. The Trump tax reform provides real incentives for US companies to repatriate their offshore profits and earnings. This may lessen the availability of US corporate capital to invest overseas. China still craves American technology, capital and innovation. It may have to create a more attractive business environment for investment, both foreign and domestic.