China’s Tax Policy Development Amidst Trade War - Where Is The Dragon Heading?

; posted on
December 3rd, 2018

As the world’s two largest economies wrangle for global influence, China and US have been embroiled in a big trade battle on several fronts over the past few months. The US has imposed three rounds of tariffs on Chinese products this year, totalling $250bn worth of goods. The first two rounds placed 25% tariffs on $50bn worth of imports from China, and Beijing retaliated in kind. 

On 17 September 2018, Washington announced to go ahead with plans to raise tariffs on $200bn of Chinese goods - first introduced in September - to 25% (up from 10%) starting in January 2019. However, after the two leaders met during G20 summit, the plans to raise tariffs seems to be on hold as the US announced a temporary pause on 1 December 2018. US and China agreed to extend the truce to the extent the negotiations on China’s policies with respect to forced technology transfers, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture reach an agreement. 

Apart from the agreed truce between China and Us, up to date, the trade war, according to the report released by European Chamber of Commerce in China, is causing significant disruptions to global supply chains (as stated by 54% of the respondents). As a response to the disruption, some 7% have either moved or are planning to move their production out of the mainland and a total of 17 per cent of respondents reported that they were delaying further investment and/or expansion.

China tax policy

The biggest concern of this trade war is the probability of foreign investors to re-locate their business to countries such as Vietnam, Mexico or India who are not subject to the tariffs. About 70% of China exports to USA come from foreign investors such as Japanese, Korean and European. Therefore, as preventive measure China is reassuring foreign investors by opening up new sectors, enforcing IP more forcefully and considering tax reductions.

Tax policies encouraging innovation were implemented to increase the rate of Foreign Direct Investment, including making all enterprises eligible for a higher additional deduction rate of R&D expenditure, which used to apply only to some tech firms. The Chinese government also introduced the tax deferral regime for withholding tax on dividends and distributed profits reinvested into directive investment. The application scope of this tax incentive is extended from the foreign investment projects under the encouraged category to all non-prohibited foreign investment projects and fields.

Related to indirect tax, China has deepened value-added tax reform this year, including lowering VAT rates for the manufacturing industry and some agricultural products. Additionally, as a trade war with the United States escalates the tax rebate has raised to 16 percent for those exports currently getting a rebate of 15 percent or 13 percent.

On 13 November, Chinese Ministry of Finance stated that China would continue to reduce taxes and fees, maintaining fiscal expenditure at a relatively high level to back the private sector and stabilize economic growth. Together with a series of measures that debuted so far, which aimed to boost the real economy, the whole year’s tax and fee reductions are expected to be more than 1.3 trillion yuan ($186 billion).

Other policy

Apart from the tax policy package, SAT also pledged more supportive policies and better services to encourage investment. The government will increase support for reform and innovation at its pilot free trade zone with measures unveiled on November 23 to improve the investment environment and trade facilitation. Moreover, China will continue to refine its business environment with more measures to be rolled out to cut red tape and facilitate investment.

China’s strategy to attract the investor amidst the trade war is expected to paying off as US FDI into China has not only kept flowing but has actually increased this year. Foreign direct investment into China increased 3.3 percent year-on-year to USD 101 billion (CNY 701 billion) in January to October of 2018. The positive growth is expected to continue align with the government plan to incentivize the business player.

Sources: European Chamber, Chinese Government, Chinese Ministry of Finance

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