SUBSCRIBE TO THE BULLETIN TODAY!

China Tax Reforms Underway

The latest round of tax reforms on the Mainland could mean lower duties for those doing business in China, writes RUBY ZHU

Buffered by a surge in tax revenues, which jumped 20.3 percent last year, the Central Government in October issued a new plan to reform China's export tax rebate system.  China generally overhauls its tax system every decade, with past reforms taking place in 1983 and 1994. This year, China is starting to review its tax system, but unlike previous changes, this round of tax reform will be implemented in stages to minimise the impact on businesses.      

New export tax rebate policy

In the September 2003 issue of The Bulletin, we mentioned that China would adopt a new export tax policy. Under the plan, tax rebates owed in 2002 and 2003 were scheduled to be paid off by January 15 and the end of May this year respectively.  However, the Ministry of Finance has yet to finalise the details. Since the government is far behind on its rebate payments, commercial banks must offer enterprises short-term working capital loans guaranteed by their export tax rebates receivables. The Central Government must pay full interest on such loans from 2004, but exactly how this will work is still unclear.

The Central Government will cover 75 percent of the loans while local governments will pay 25 percent. Under the old policy, local governments got 25 percent of the value-added tax receipts, but the Central Government had to pay 100 percent of export tax refunds, resulting in a transfer of wealth from the Central Government to the local governments. Similarly, as production processes generally take place outside of export ports, some local governments may have been getting more than they were entitled to.  This is because governments can levy VAT on goods produced in factories under their jurisdiction, but port governments have to refund 25 percent of the export tax. As a result, various local governments may adopt new protective measures, such as defaulting on export tax rebates or restricting exports to protect their interests.

Many firms will be affected by the new policy, and as problems usually arise at the time when a new policy is implem-ented, Hong Kong businesses should keep a close watch on these developments.  

Farmers to pay less tax

The Central Government further reformed China's tax system last month by waiving the special agricultural product tax and lowering the average agriculture tax rate from 8.4 percent to 7.4 percent. Although agriculture tax revenues account for just 5 percent of the total, the move will ease the financial burden on the country's 900 million farmers, narrowing the income gap between farmers and urban dwellers and strengthening farmers' purchasing power.  As a result, the low-end consumer goods market may further expand this year.    

Changes to VAT

Value-added tax accounts for a third of China's tax revenues, but it has long been a headache for many Hong Kong businesses.  As part of its reforms, the Central Government will impose a consumption-oriented VAT on eight sectors in the northeastern industrial base of the country. This will allow companies to offset the tax paid on the production of new fixed assets as well as non-fixed assets.  The move will reduce China's tax revenues to a certain extent, but will relieve the financial burden on enterprises. 

What should be noted, however, is that the VAT on imports remains unchanged, and the new consumption-oriented VAT is limited to northeast China at this stage. Hong Kong businesses having investments in other parts of the country will not benefit from this measure until next year. 

Corporate and personal income taxes

Changes to these two taxes will affect Hong Kong enterprises. Details have yet to be unveiled, but the Central Government has made it clear that it plans to gradually unify corporate income tax for domestic and foreign enterprises. This means that foreign enterprises will lose their preferential tax perks. However, as the new unified tax rate may be lower than the current tax rate of 33 percent, it is believed that foreign investors will not change their plans to go into China. The threshold for personal income tax will also be raised, but whether the tax rate on high-income earners will be changed remains a concern.     

On the whole, the new round of tax reforms looks like lower tax rates for doing business in China. In 2003, China's tax revenues grew 20 percent, far higher than its GDP growth rate of 8.5 percent. Instead of causing China financial difficulties, the new tax relief package will further drive the nation's eco-nomic growth.

Ruby Zhu is the Chamber's China Economist. She can be reached at, ruby@chamber.org.hk