MNI EXCLUSIVE: China Resistant To US Global Tax Plan: Advisors

China is little inclined to go along with the U.S. plan for a global minimum corporate tax as Beijing wants to protect small and medium companies and free trade zones and remain attractive for foreign businesses, policy advisors said.

Beijing is yet to respond to Treasury Secretary Janet Yellen's call for G20 countries to agree on a global base corporate tax rate to stem competitive cuts and evasion. While the U.S. is hoping countries will reach agreement soon - a G20 finance ministers' meeting is due in July - China sees consensus as unlikely.

The Chinese government thinks progress on the issue is almost impossible as it is hard to get all countries on board, said a senior advisor close to the government.

China's corporate income tax rate stands at 25%, above the 21% suggested as the minimum under the U.S. proposal. However, SMEs and foreign companies are taxed at 20% while strategic industries such as semiconductors pay just 15%. Effective rates are much lower thanks to various breaks, said advisors. According to a report from Yuekai Securities, the average tax rate across company categories is around 20.2%.

SOVEREIGN ISSUE

The government, which reduced fees and raised the threshold for value added tax for some companies in the wake of the pandemic, has vowed further help making any hike in tax rates unlikely, advisors said.

"Beijing will want to protect small-and-medium enterprises who are vital for employment," said an advisor close to the government.

The U.S. proposal is in direct conflict with China's free trade zone experiment as tax forbearance is one of the key pillars to attract foreign businesses, said Zhang Yiqun, the director of a fiscal studies institute affiliated with Jilin province's finance department. "Taxes are a sovereign issue. Strictly speaking, there is not much room for negotiation," Zhang added. China's free trade zones, currently numbering over 20, are differentiated by industry priorities or goals. The Zhejiang zone, for instance, aims to encourage digital innovation.

"Whether 21% is a reasonable threshold for a minimum tax rate needs to be discussed…but the entire process may not be completed as soon as the U.S. hopes," said Liu Ying, a research fellow at the Chongyang Institute for Financial Studies at the Renmin University of China.

LOCAL DEBT

However, a senior advisor who asked for anonymity due to the sensitivity of the issue, said that China should consider the U.S. proposal as competitive tax cuts globally have tended to harm government revenues and investment while benefitting big multinational companies more than domestic firms.

President Joe Biden is proposing to raise the domestic corporate tax rate to 28% from 21%. Biden's plan also proposes to lift taxes on U.S. companies' foreign income to 21% from 10.5% to encourage reshoring.

Zhang dismissed the possibility of Beijing embarking on another round of tax cuts to counter such a move. Previous tax cuts have not left much room for another as China has the headache of local government debt, he said.