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The new red tax

From Canadian Business Online,

The new red tax

Changes to Chinese taxes level the playing field.

By Joe Castaldo

Joe Castaldo is a staff writer for Canadian Business. He joined the magazine in January 2007 and has written about a variety of topics, including management issues and investing. For Canadian Business Online Joe writes about clean technology — companies, tech developments, and environmental policy and investing. More stories by this author >>

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One of the benefits of doing business in China has long been the generous tax breaks given to foreign companies. Not for much longer. Beginning next year, both domestic and foreign businesses operating within the country will pay a single corporate tax rate of 25%. Foreign companies were previously exempt from paying taxes for their first two years in China, and then paid roughly 15%, less than half what Chinese companies paid.

The two-tier system was originally designed to encourage foreign investment but was much maligned by Chinese-owned companies. Ending the reliance on special incentives to attract investment is a sign of a maturing country, and the result is a level — though much more competitive — playing field, says Charles Fu, a tax specialist with Toronto-based chartered accountancy Mintz & Partners. “No one is going to have an edge anymore,” he says. “Business plans will drive competition more so than tax benefits.”

There are still some incentives for foreign companies. Low-profit companies have to pay only a 20% rate, and high-tech enterprises will pay an even lower rate of 15%; but no one is sure how those terms will be defined. China is also proposing that foreign companies already in the country won't pay the new rate for five years, but it's unclear whether a company that sets up shop before the new rules take effect next year will get the same benefit.

Resolving these issues — which won't happen until at least September — isn't expected to have a significant impact on investment in China. “The country is booming, and if the business is good, then tax is just another cost factor.” But if you're thinking about expanding into China to get a tax break, you had better move quickly.