China economy

China offers tax breaks to foreign firms in bid to boost investment, counter US incentives

Companies will be exempt from withholding taxes on profits they reinvest in specified industries, Beijing says

PUBLISHED : Friday, 29 December, 2017, 2:00pm
UPDATED : Friday, 29 December, 2017, 10:46pm

China is responding to Washington’s tax overhaul by offering foreign companies a break on Chinese taxes in a bid to retain investment.

The measure announced late on Thursday is Beijing’s first major reaction to the United States’ decision to cut corporate tax rates. It follows a flurry of promises by communist leaders to spur growth in the slowing, state-dominated economy by opening more industries wider to overseas companies.

Foreign firms will be exempt from withholding taxes on profits they reinvest in industries specified by Beijing, the finance ministry and tax agency said. It is also retroactive to January 1, 2017, meaning such companies will receive a refund on taxes paid this year.

Beijing wants to “attract foreign investors after a host of countries unveiled similar measures to lure foreign and domestic investment”, Xinhua reported.

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The exemption will apply to companies that reinvest profits in industries cited in government investment catalogues, the announcement said. These include solar and wind power, “green farming” and other fledgling fields in which Beijing is trying to develop technology.

Supporters of Washington’s tax changes enacted this month said they will encourage investment in the United States. Governments, including Canada’s, and private sector analysts have warned that they could draw money away from their economies.

It was unclear whether China’s tax break was significant enough to influence investment decisions in emerging industries in which foreign companies complain they are shut out of promising areas or face pressure to hand over technology to potential Chinese competitors.

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China has long been among the top global destinations for investment, but foreign enthusiasm is cooling. Surveys by business groups have shown that companies have shifted emphasis to other Asian economies seen as more profitable or less restrictive.

The Organisation for Economic Cooperation and Development ranks China 59th out of 62 countries in openness to foreign direct investment.

Foreign investment into China in the January-October period grew just 1.9 per cent from a year earlier but jumped in November, according to official figures. However, Chinese economists have said that is a poor measure of foreign interest because the bulk of it is money brought home by Chinese companies and disguised as foreign investment to gain tax breaks.

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China is a big market for cars, aircraft, smartphones, cosmetics and other goods. But Beijing bars foreign companies from fields such as finance, telecoms and utilities. In others, companies are required to work through local partners that might become competitors.