China announced Thursday that it plans to temporarily remove tax requirements on earnings for foreign businesses, in a desperate effort to retain American companies that plan to leave the country following the Trump administration’s overhaul of U.S. taxation.
However, to be eligible for the exemption backdated to January 1, 2017, companies must redirect those profits into sectors determined by the Chinese government — namely technology, mining, railways and architecture, Beijing’s Finance Ministry reports. The Ministry’s official statement this week says that the new measure will “promote the growth of foreign investment, improve the quality of foreign investment and encourage overseas investors to continuously expand their investment in China.”
The new tax overhaul in the U.S. is likely to appeal to companies already caught up in the web of China’s bureaucratic legal system, rising labor costs and heavily favored domestic competition. President Trump’s new tax measures are a clear move to raise the competitiveness of the United States around the world.
The new corporate tax rate is substantially lower than during the Obama era, and shifts the U.S. from being one of the most expensive places to do business to one of the cheapest globally. Tax on companies is expected to drop from 35 percent to just 21 percent. Officials in China are concerned that it will lead to American companies packing up and taking their profits — as well as jobs — back to the US.
Although this week’s announcement from Beijing did not refer to the U.S. tax overhaul specifically, analysts told the New York Times that it almost certainly is a policy move to counter the new changes. Until now, foreign enterprises in China have been required to pay a corporate tax rate of 25 percent, as well as make myriad social security and other red tape payments. This makes the overall corporate tax rate substantially higher than in many other countries.
Foreign and joint-venture enterprises claim that doing business in China is becoming increasingly difficult, with complex new regulations and forced technology transfers regularly added. Moreover, Beijing appears to favor domestic firms by blocking or limiting access to Chinese consumers for non-Chinese businesses.
Several business groups claim that the Chinese government’s new corporate tax reduction is not significant enough to retain American firms. The U.S.-China Business Council’s Jake Parker told the New York Times that some member companies are already planning to rapidly repatriate earnings to the U.S.
“Some are concerned that China may impose foreign exchange controls if these repatriations mount up and lead to capital outflow pressures, like we saw early this year and last year,” he said.
Nonetheless, the move by China will only add to the Trump administration’s already growing frustration with Beijing. This week, the U.S. accused China of violating U.N. sanctions against North Korea, after reports emerged claiming that Chinese ships were illegally transferring oil to North Korea.
Caught RED HANDED – very disappointed that China is allowing oil to go into North Korea. There will never be a friendly solution to the North Korea problem if this continues to happen!
— Donald J. Trump (@realDonaldTrump) December 28, 2017
According to the Chosun Ilbo news outlet in Seoul, numerous South Korean officials claim that Chinese ships transferred oil cargo to the North around 30 times between October and this week.
Chinese ministry spokeswoman Hua Chunying said Wednesday that China has “completely and strictly” enforced trade restrictions with North Korea, joining the effort to deter Pyongyang from developing nuclear technology and intercontinental ballistic missiles (ICBMs). However, intelligence agents say U.S. satellites have observed the cargo transfers from China to North Korea in the West Sea area, even recording the names of the individual ships involved.
— FOX Business (@FoxBusiness) December 29, 2017