Why China should slash taxes just as the US seeks a global minimum rate for corporations
- Washington’s push for world economies to sign up to a minimum corporate tax level of 15 per cent offers Beijing a chance to reform its own tax regime by cutting corporate and personal income taxes and streamlining VAT and social security contributions
- Doing so could help China retain multinationals spooked by the trade war and rising business costs, attract more FDI, and bolster the country’s competitive edge in global supply chains
Beijing’s cautious approach is puzzling, to say the least. As the world’s second biggest economy and the top recipient of foreign direct investment (FDI), China should play a more active role in international discussions of this significant issue.
Since 2012, the Paris-based Organisation for Economic Cooperation and Development has been leading negotiations on a global tax plan targeting multinationals and digital services firms among its nearly 140 member countries. Even though China is not a member, reports suggest it has been “fully involved”.
In April, Washington joined the fray and accelerated the momentum of discussions as US Treasury Secretary Janet Yellen made the case for a global minimum tax on multinational companies, which could help end a “a 30-year race to the bottom on corporate tax rates”.
Following a US proposal that it would impose a global minimum tax of 21 per cent for US companies, there had been speculation it would push for a similar rate worldwide.
Higher taxes could prompt US companies to shift jobs and profits to tax-haven jurisdictions, hence the idea to impose a global minimum.
This month, Washington indicated that it would accept a global minimum tax of 15 per cent, a rate much lower than its stated goal of 21 per cent for US companies. This was aimed at speeding up the international negotiations.
In recent years, the Chinese government has been under increasing pressure to cut corporate and personal income taxes, particularly after Trump introduced a sweeping tax overhaul in December 2017 by reducing the corporate tax rate to its lowest point in decades and cutting individual taxes for most families.
But Beijing has resisted the pressure for an overhaul of the tax regime and chosen instead to make incremental changes including the decision in 2018 to raise the tax-free threshold for personal income tax and the moves in 2019 to cut the rate of value-added tax (VAT) for manufacturers to 13 per cent from 16 per cent, and the VAT rate for transport and construction sectors to 9 per cent from 10 per cent.
Since the coronavirus pandemic struck in late 2019, the Chinese government has embarked on an aggressive cost-cutting Covid-19 relief programme for enterprises including reducing labour, land, and energy costs as well as offering reductions in VAT and corporate taxes for micro and small firms. Last year, China became the only major world economy to grow but Chinese Premier Li Keqiang said on Wednesday that the country’s 44 million micro and small firms and 95 million self-employed individuals still faced difficulties in their production and operation.
To retain those multinationals, attract more FDI, and bolster the country’s competitive edge in global supply chains, China should take advantage of the global discussions of significant tax reform and seriously consider a sweeping overhaul of its own tax regime.
Wang Xiangwei is a former editor-in-chief of the South China Morning Post. He is now based in Beijing as editorial adviser to the paper