End of super-preferential policies will create a level playing field for domestic and foreign enterprises to compete
As of Dec 1, the Chinese government began to collect two taxes from overseas-funded companies and individuals with commercial interests in the country, namely the city maintenance and construction tax, and education-supporting tax. This marks the beginning of a standard tax treatment for both domestic and foreign companies.
For decades, China has reserved for overseas enterprises super-preferential tax policies. Early on in its reform and opening-up, China’s domestic economic climate was more conducive to State-owned enterprises than to international enterprises. This was because the former could secure government support and thus had certain advantages in getting bank loans and financial subsidies. In a bid to attract foreign investment to help propel its economic growth, China introduced preferential tax policies for international companies.
The policies, in fact, are not conducive to promoting fair competition between domestic and foreign enterprises, and, to a certain extent, affect the development of domestic enterprises, private ones in particular.
So unifying the national tax treatment for domestic and foreign enterprises will create a fairer environment for competition between domestic and international companies.
China has already expedited the process of phasing out preferential policies for State-owned enterprises. These enterprises have no more advantage than their foreign counterparts when seeking bank loans. The identity of enterprises, domestic or foreign, State-owned or private, no longer serves as the chief concern of banks in granting loans. At the same time, the country’s banking system is becoming increasingly mature with the introduction of foreign banks and the further development of shareholding commercial banks. State-owned commercial banks have gone through share-holding reforms.
State-owned enterprises can no longer secure subsidies from the government merely by means of their State-owned identity, and neither do they qualify for other policy incentives. So it would be unreasonable if preferential policies continue to serve the interests of foreign companies.
As a matter of fact, the new taxation will not add much to the costs of foreign enterprises. In 2009, the city maintenance and construction tax totaled 154.41 billion yuan ($23.23 billion), only 2.59 percent of the country’s tax revenue. As for education-supporting tax, it totaled just 65.08 billion yuan in 2008. Viewed in this light, the two taxes make up only a small proportion of the country’s tax revenue and therefore will not impose a heavy tax burden on foreign enterprises.
It is true that the new taxation means foreign companies will now have to bear extra charges, but these will vary from one company to another. For most foreign-funded companies, the effect will be rather limited, as the two taxes in question are actually surcharges based on the total amount of consumer tax, value-added tax and other tax items the companies pay. Even for small-sized companies, it is unlikely that any of them will be forced out of the China market simply because of surcharges that represent a small slice of their profits.
The key factor deciding the fate of a company lies in its competitiveness. For those uncompetitive companies that are already being marginalized, the situation will definitely be aggravated by the new taxes.
The fundamental purpose of levying the taxes is for the provision of public services. The city maintenance and construction tax as well as the education-supporting tax are aimed at improving public services. In the mid-1980s, the State Council, China’s cabinet, published the regulations about these two taxes and since then, domestic enterprises have been paying them.
Foreign companies nowadays enjoy the public services provided by governments at all levels, just as domestic companies do, so they should no longer be exempt from the city maintenance and construction tax and the education-supporting tax.
The improvement of public services in the Chinese mainland has reduced the operation and production costs of foreign enterprises. As the provider of public services, the Chinese government has more than enough reasons to impose on the service beneficiaries the city maintenance and construction tax as well as the education-supporting tax.