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China equates foreign firm taxes on par with domestic firms

December 1, 2010

The beginning of December, the last month of accounting year 2010 always marks financial consolidation in China – furtive spending by Chinese provincial governments eager to dispense their budgets before the year end and tax collection by the central government.

This year is no different, even as provincial Chinese governments splurge on frequent conferences, launching of various projects, purchasing luxury office facilities and establishing awards for civil servants, the central government in its push to foster domestic companies and end their courtship with foreign firms has said it will begin collecting city maintenance and construction taxes and education-supporting taxes from foreign companies, and individuals with commercial interests in the country, effective Wednesday, 1st December. Construction tax comes in at 5-7 percent of the three turnover taxes (i.e. value-added, consumption and operation taxes) and the Education tax is 3 percent of the three. Xinhua, the state run media agency reckons it means the cost of doing business for foreign businesses in China will rise “by up to 10 percent”. Morgan Stanley, meanwhile, believes the effect on bottom lines will be around 6 percent.

The government is phasing in tax increases over five years, with foreign companies paying 18 percent in 2008, 20 percent in 2009, 22 percent in 2010, 24 percent in 2011 and 25 percent from 2012, although some discrepancies may exist due to local government preferences.

The move will create a level playing field, in terms of taxation, for all companies operating in the country, Zhang Hanya, chairman of the Investment Association of China told Global Times.

Since its opening up in the 1980’s, China has supported preferential policies to attract FDI, new technology and management to enable the country to learn, adopt and grow exponentially. Foreign companies were lured to set up manufacturing bases and headquarters in China through land, tax and other incentives. However, ever since China’s position globally got stronger, western markets crumbled and foreign cash started flooding into China, Beijing has thwarted incentives meted out to foreign companies and individuals and provided a boost to domestic Chinese companies instead. As a result, Chinese companies have gained the muscle to strategically invest abroad, aggressively acquiring natural resources, metals, automobile and consumer durable companies even as the nation strengthens its position in technology and equipment manufacturing.

Western Chambers of Commerce have complained of the change in attitude towards them earlier this year with the American and European Chamber of Commerce coming out vociferously against the Chinese administration. However China didn’t seem to mind much when it blocked Google or provided better incentives to Chinese equipment manufacturing units earlier this year.

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