China urged to join global minimum tax regime, as Hong Kong says it may be ‘restrained’ by new rules
- Few obstacles stand in the way of China accepting a global minimum tax rate because the country is already a magnet for investors, analysts say
- But the new tax arrangements agreed by G7 could impact Hong Kong, where foreign companies are treated to a range of concessions
China has been urged to join a push by the United States for a global minimum tax rate, with experts saying it is an opportunity for Beijing to participate in international economic governance and create a common ground with Washington as high-level trade talks resume between the world’s two biggest economies.
There will be little harm in China accepting the tax regime because the country is already a magnet for global investors, analysts said, though Hong Kong could be affected.
“China will probably accept it, because the country no longer counts on preferential tax to attract investors and our actual rate is much higher,” said Ding Yifan, a senior researcher with the Development Research Centre of the State Council, a government think tank.
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China has a nominal corporate tax rate of 25 per cent and grants a 15 per cent rate for qualified hi-tech companies.
While the cancellation of some local tax preferences has contributed to the relocation of foreign manufacturers in recent years, authorities have boosted efforts to open market access and improve the business environment to keep them onshore.
Ding, however, expected more negotiations with the US on the matter as the two countries resume economic dialogue.
“China can put its new demands on the table,” he said.
Yellen, who proposed the global minimum tax in April, called the G7 decision on Saturday “a significant, unprecedented commitment” to level the playing field for businesses and encourage countries to compete on positive bases.
Andrew Choy, international tax and transaction services leader at EY Greater China, said the proposed tax arrangements would impact Hong Kong more than the mainland.
In Hong Kong the de facto tax rate is often lower than the statutory 16.5 per cent, whereas most foreign firms pay more for their mainland subsidiaries.
“It won’t reduce China’s competitiveness, nor force investors to relocate,” he said, adding Beijing should grasp the opportunity to make its voice heard.
We would like to use low tax rates to promote development for certain sectors so we may be restrained by using a low tax rate regime
Speaking in Hong Kong’s legislature Monday, Financial Secretary Paul Chan said the proposed changes to the global tax regime might affect some of the tax concessions the government offers to various industries.
“We would like to use low tax rates to promote development for certain sectors so we may be restrained by using a low tax rate regime as a competitive method,” Chan said in response to a lawmaker’s question.
A global tax minimum is likely to be discussed further by the Organisation for Economic Cooperation and Development (OECD) and the Group of 20 later this year. China’s finance ministry has not yet commented on the G7 agreement.
Cao Hongyu, a researcher with the Bank of China, one of the nation’s “big four” state-owned banks, said there were few internal obstacles for the government to implement the global minimum tax rate.
International negotiations would provide a chance for China to participate in and lead global economic governance, he said in a research report last week.
“Pushing forward the talks for a global minimum corporate tax rate can help safeguard China’s tax sovereignty, build a good business environment and protect the interests of Chinese companies that expand globally,” Cao said.
China should try its best to prevent excess limits on multinational companies and speak out for emerging economies, for instance setting preference for the least developed countries, he said.
“It will project China’s image of being a responsible country and help fight against deglobalisation.”
Additional reporting by Bloomberg
