US tax cuts may test Chinese firms’ competitiveness

Source:Global Times Published: 2017/11/21 22:33:39

Illustration: Peter C. Espina/GT

The US House of Representatives on Thursday passed a tax reform bill, a milestone piece of legislation that would mark the most significant change in the US tax system since 1986.

The House vote does not mean the tax reform process is over. Next, the US Senate will have to pass its own tax measure. Then, the two chambers will agree on a final version, which will be submitted to US President Donald Trump for approval and become law.

The US and China are the world's first- and second-largest economies, and their respective tax policies have great influence on industry competitiveness on both sides. Overall, China's tax burden is relatively low compared with other countries, although a little higher than the US. Since China is dominated by the indirect tax system, as much as 90 percent of tax revenue comes from companies. The Trump administration's pursuit of massive tax cuts may push up the relative production cost of Chinese companies, which will also face constraints on labor, high land prices and production capacity issues.

In recent years, China has also taken measures to reduce taxes and fees. On April 19, the State Council, China's cabinet, announced tax cuts after an executive meeting. Together with other measures announced earlier this year, companies are expected to save more than 580 billion yuan ($87.43 billion) on taxes and fees in 2017.

The growth rate of fiscal revenue in China has decreased gradually. Since the beginning of the year, China's economy has rebounded and business conditions have improved. Credit should be given to tax cuts and other cost reductions for companies in recent years.

Despite the success achieved in cutting corporate taxes and other costs in recent years, China's tax reform process still has far to go. In February, the corporate income tax law was amended for the first time in 10 years, providing more tax benefits. However, the corporate income tax rate stayed at 25 percent, and there are more than 10 types of corporate taxes in China, with income tax, value-added tax and sales tax the three largest ones.

According to 2016 tax data, these three categories of taxes generated 62.2 percent of total tax revenue. In addition, Chinese companies must pay a 7 percent urban maintenance and construction tax, a 5 percent education surcharge and a 1 percent flood control fee.

US tax cuts will put Chinese companies' ability to innovate and compete to the test, especially exporters that rely on government subsidies and support policies. If companies cannot improve their competitiveness, it will be hard to compete with US companies, even with subsidies and support policies.

The US tax overhauls are intended to keep US companies at home and prompt them to bring business back to US. The US is closing the door using market means, attracting the best businesses in the world to relocate to the US and blocking businesses that are not truly competitive outside the US market.

The Tax Cuts and Job Act of the House contains many innovations that will break with previous tax practices in the US. It will have great impact on business conducted by Chinese companies in the US and potentially trigger the compatibility issue of tax treaties.

Chinese tax policymakers should pay close attention to the trend of tax reform in US and consider adjusting the nation's own policies to maintain the competitiveness of Chinese companies. It's expected that the Senate tax reform bill will be different from that of the House, so it is necessary to keep a close watch on the progress of tax reform in the US Congress.

The article was compiled partly based on a report by KPMG China.


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