Chinese Tax Reforms Continue Apace

By Global Tax Weekly

China may have been upbraided by the International Monetary Fund earlier this month for the lack of progressivity in its personal income tax regime – how ironic that a country run by communists has, according to the IMF, the highest level of income inequality in the world. However, in many other ways, China seems to be making good progress in adapting its tax system to the demands of today’s economy, including with proposals to improve tax incentives for scientific research.

Value-added tax has now been extended to all areas of the economy, and earlier this month, Chinese Premier Li Keqiang said that reform of the VAT regime would continue. VAT has already saved businesses an estimated CNY1.6tn (USD239.8bn) since its introduction, the Ministry of Finance said.

It was also announced recently that China is to allow foreign investors to defer tax on dividend income if it is reinvested into approved projects through an increase in the areas of the economy that foreign investors can participate in, via a reduction in the industries covered in China’s “negative list” of precluded investment.

China also dished out CNY1 trillion worth of tax cuts in the first half of this year alone, with businesses having seen tax savings worth CNY2 trillion during the four years between 2013 and 2016, Li claimed recently, adding that further reforms are planned to reduce the discretion of tax authorities and prevent arbitrary taxation.

This last point could be of particular significance for foreign enterprises operating in China. Deloitte’s 2017 Asia Pacific Tax Complexity survey showed that there was a sharp contrast in respondents’ views on China’s tax regime, with some viewing the country’s tax environment as predictable, but others unpredictable, reflecting the fact that taxes tend to be administered and collected at local, rather than central, level. So, one’s experience with the Chinese tax system can vary depending on the local tax office’s interpretation of tax legislation and regulations, which in a country China’s size is not conducive to predictability.

As to the tax compliance burden, other surveys suggest that China has a long way to go before the tax regime can be considered even remotely simple. However, it would appear that good progress is being made.

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