Wang Xiangwei
SCMP Columnist
China Briefing
by Wang Xiangwei
China Briefing
by Wang Xiangwei

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
The move by the United States to support an international effort for a global minimum corporate tax, which would apply to multinational firms, has injected momentum into discussions on how international businesses are taxed amid speculation that a deal could be reached as early as October.
Curiously, this significant international taxation reform has hardly caused a ripple in China with news reports and commentaries discussing the issue largely in the global context, giving the impression that it has less bearing on the country, home to many multinationals. 

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.

Moreover, Washington’s push for the global tax plan could offer Beijing a good opportunity to further reform its own tax regime by cutting corporate and personal income taxes and streamlining its value-added tax categories and social security contributions.
This would help Beijing to gain geopolitical and geoeconomic benefits as well as attracting FDI and boosting domestic manufacturing at a time when the Washington-led alliance against China over human rights, Taiwan, and trade practices is putting pressure on multinationals to relocate some of their operations out of the country.

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. 

The US proposal comes as President Joe Biden needs to generate revenues and finance his US$2 trillion infrastructure spending spree at home by planning to raise the US corporate tax rate to 28 per cent from 21 per cent.

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. 

Its new position has gained traction in major European countries including Germany and France and raised hopes that significant progress would be made in the third meeting of the finance chiefs of the Group of 20 leading economies scheduled for July ahead of the G20 summit of leaders in October.

Why it’s time for China to cut its 45 per cent income tax rate

For leading European countries, the discussions of the global minimum corporate tax would help open doors for horse-trading with Washington over their plans to impose bigger digital taxes on large companies, particularly US tech giants. European officials have long complained that those companies pay little tax on sales to customers in their countries.
Meanwhile, Beijing appears to have taken a wait-and-see attitude with officials refraining from public comments. With an overall 25 per cent corporate tax rate, China seems less impacted, according to analysts. Previous concerns that Hong Kong could be hit hard by Washington’s initial 21 per cent minimum proposal have eased now it has offered to accept a 15 per cent minimum.
Occasional articles have quoted analysts saying that the US’s global tax plan could enable Beijing to extract concessions from Washington for agreeing to the initiative. Some have suggested that Beijing could use the leverage to press Washington to reduce tariffs on Chinese imports. In 2018, Donald Trump launched a trade war against China by imposing tariffs on Chinese goods, which sent bilateral ties into a tailspin.
Donald Trump’s trade war with China sent relations into a tailspin. Photo: AFP
But Beijing could do more to better position its economy in the post- pandemic world, particularly as its geopolitical confrontation and economic competition with Washington looks set to intensify.

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.

US President Joe Biden needs to generate revenues and finance his US$2 trillion infrastructure spending spree at home. Photo: AP
Meanwhile, China is also faced with a tough international environment. For instance, the European Union is considering a border adjustment carbon tax on imports, which if implemented, could have far-reaching implications for China, EU’s largest trading partner, and those multinationals operating in the country. The idea is to level the playing field for European companies as it would tax imports for their greenhouse emissions the same way as it would tax the domestically produced goods. According to a recent report from the Hinrich Foundation, which specialises in global trade, China, being the most carbon intensive economy, could see its exports to EU heavily taxed. It said that over the next 18 months, people could see a renewed appetite for multinationals to relocate their operations out of China due to worries about the carbon tax. The relocation has already picked up speed due to the China-US trade war and rising business costs in China, helped by the fact that China’s neighbouring countries have been offering incentives to lure those multinationals.

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