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A new
Chinese law has erased many of the previous tax benefits
for foreign firms, but it also offers abundant
opportunities for multinationals that are willing to
help transform the country into a more sophisticated—and
greener—producer of high-end goods.
For many
foreign firms, the law, which took effect this year,
will inevitably increase the cost of doing business in
China. It sets a single corporate income tax rate of 25
percent for all foreign and domestic companies—low by
other countries’ standards (the US rate is 35 percent,
for example) but a shock to the system for the many
firms that have been paying deeply discounted rates. For
those companies, the law will have the effect of
increasing taxes by up to 25 percent over the next five
years. In addition, China will place multinationals
under greater scrutiny as it seeks to ensure that it’s
getting its share of the wealth generated by the
country’s economic boom.
The new
tax regulations also form a map, of sorts, showing how
the Chinese authorities plan to transform the country:
China wants to improve its transport infrastructure. It
is looking for more high-tech jobs for its engineers. It
wants to green its industry. And it hopes to dispel its
image as a manufacturer of cheap products and become a
provider of high-quality, high-margin goods.
The
country is providing tax incentives to make all this
happen. Of course, the authorities may tweak the rules
for months to come—there’s no telling what exact shape
the regulations will eventually take. It’s crucial for
firms wishing to benefit by assisting in the transition
to be sure they’re relying on the most up-to-date
official guidelines.
That
said, here are a few general things multinationals can
do to take advantage of the tax breaks. Some may require
a willingness to diversify or alter operations in China.
DO
RESEARCH.
Some of
the biggest tax breaks have been reserved for
multinationals engaged in qualified R&D activities in
China.
REPAVE,
REUSE, RECYCLE.
A
foreign company with a qualifying infrastructure,
environmental or recycling business in China may be
eligible for a three-year tax exemption and a subsequent
three-year rate reduction, according to official
guidelines. Even companies without such businesses may
be able to benefit from tax credits if their Chinese
operations set up initiatives that protect the
environment, save water or produce safety equipment.
SOW,
REAP, GO FISHING.
Companies engaged in agricultural, forestry, animal
husbandry and fishery activities may qualify for lower
rates.
GO
HIGH-TECH.
Lower
rates also may be available for new high-technology
firms in China that own intellectual property and employ
knowledge workers.
Companies should also take the following steps to limit
their tax exposure and avoid the risk of triggering a
Chinese audit:
MIND THE
EXPAT HEAD COUNT.
The presence of a multinational’s non-Chinese employees
in the country for more than 180 days a year could
prompt the authorities to classify the MNC—not just its
local subsidiary—as a permanent Chinese establishment
and assert that the parent company should be subject to
higher taxes. Companies should therefore schedule
more-efficient trips, make liberal use of
videoconferencing, limit employees’ in-China vacation
time and monitor non-Chinese employees’ time at the
summer Olympics in Beijing.
DOCUMENT, DOCUMENT, DOCUMENT.
Certain transfer payments from a Chinese subsidiary to
its foreign parent—interest, rent, service fees, some
kinds of royalties—will continue to be deductible. But
all such payments, along with related employee
activities and the transfer of company goods and
intellectual property into China, must be properly
documented—in Chinese.
The new
tax law provides an opportunity for multinationals to
fold their global tax strategies into their global
business strategies—or, if they have already done so, to
reimagine that integration. A well-thought-out
integration of strategies will help firms make the most
out of China’s coming transformation.
****
Jeff
Olin, based in Chicago, is a national managing partner
in the International Tax Services practice of Grant
Thornton, the US member firm of Grant Thornton
International. Gary James is a partner in the
International Tax Services practice of the Hong Kong
member firm of Grant Thornton International. |
