CHINA: Country seen taking cautious approach to global minimum corporate tax.

As published on scmp.com, Thursday 8 April, 2021.

While Beijing is unlikely to have a major problem with Washington’s call for the world’s leading economies to agree on a global minimum corporate tax rate, China is nevertheless likely to take a cautious approach in international negotiations given the continued high level of tensions between the two top economies, according to Chinese analysts and academics.

A bigger concern for China would be the impact a global minimum corporate tax could have on Hong Kong – the seventh-largest tax haven in the world and the largest in Asia, according to an analysis published earlier this year by the Tax Justice Network, a tax advocacy organisation, ahead of Singapore at number nine.

The minimum corporate tax concept has potential risks for Hong Kong, through which some 70 per cent of foreign investment from the Chinese mainland is now channelled. One of the key advantages for a business to establish itself in Hong Kong and source its mainland-generated revenue is its low tax burden, so forcing Hong Kong to raise its corporate taxes could reduce its appeal as a business location.

China’s strained relationship with the United States could also come into play in international negotiations on a global tax deal. Some Chinese sources argue that Beijing would not cater to America’s latest initiative unless a clear advantage could be gained, such as a reduction in US tariffs on Chinese imports.

Ministry of Finance officials did not take questions on the subject at a press conference on Wednesday. And the ministry did not reply to a faxed inquiry from the South China Morning Post about the country’s position on the issue.

Nevertheless, the new US proposal has vaulted the tax issue to the top of the global policy agenda, sparking cautious optimism that a deal can be reached in the coming months.
G20 finance ministers and central bank governors endorsed the overall concept in a statement after their meeting on Wednesday, saying they “remain committed to reaching a global and consensus-based solution” by the middle of this year.

Pascal Saint-Amans, director of the Centre for Tax Policy and Administration at the Organisation for Economic Cooperation and Development (OECD), said there have been negotiations on a global taxation scheme since 2012, with 139 countries now participating. Even though China is not a member of the OECD, it is “fully involved”, he said.

“There is a very strong chance [of reaching an agreement] because many are interested,” he said. “Yes, you have a great diversity, but everybody recognises that if there is no agreement, the alternative is chaos – the alternative is a trade war that nobody wants.”

Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, said the 21 per cent minimum corporate tax being proposed by the US was unlikely to receive strong resistance from China, where the official corporate tax rate is currently 25 per cent. However, Beijing can reduce its income tax rate to 15 per cent for firms in industries encouraged by the government, including a range of hi-tech sectors such as semiconductor research and manufacturing, as well as new energy vehicles.

“If you go to the G20 with this proposal, it will go through because it’s not a big deal for China, in my opinion,” she said. “I know that the effective tax rate [after accounting for subsidies] is lower. But that’s not the point, because the ways to lower that tax are not that transparent.”

However, “even for China, tax havens are a problem”, Garcia-Herrero added.

“The losers are tax havens like Hong Kong,” she said, noting that for businesses incorporated in Hong Kong, the first HK$2 million (US$257,000) worth of profits are taxed at half the standard tax rate, while the remaining profits are taxed at the existing 16.5 per cent tax rate – both below the minimum 21 per cent rate proposed by the US.

Washington’s proposal for a global minimum corporate tax rate is part of its effort to increase US corporate tax revenue by cutting off the ability of US companies to shift income abroad, to lower-tax countries. The higher tax revenue, in turn, would help fund President Joe Biden’s ambitious US$2.25 trillion infrastructure spending bill.

Treasury Secretary Janet Yellen framed the proposal as a way to shift the framework of global competition.

“By choosing to compete on taxes, we’ve neglected to compete on the skill of our workers and the strength of our infrastructure. It’s a self-defeating competition, and neither President Biden nor I am interested in participating in it anymore,” Yellen explained in an opinion piece published in The Wall Street Journal on Wednesday.

Zhao Xijun, a professor of finance at Renmin University of China, noted that the US tax proposal was still subject to the approval of the US Congress, with the outcome uncertain. And he linked Chinese support for such a tax deal with American concessions on trade tariffs.

“It’s a proposal brought forward by the United States, not a Chinese call,” he said. “If [the US] really wants to create a fair and just environment, it should lower import duties on Chinese goods and investment barriers, rather than maintaining a double-standard.”

So far, the Biden administration has refused to ease tariffs on nearly US$370 billion worth of Chinese goods imposed during the Trump administration.

“China of course wants a fair tax environment. Rising protectionism is not good for the global economy. The US should make changes first,” Zhao said, arguing that time is on China’s side.

Wang Dehua, a senior fiscal researcher with the Chinese Academy of Social Sciences, noted that some countries, such as Ireland, provide room for multinational companies to relocate their businesses to avoid taxes. And he said that an international consensus, not a specific tax rate, should be built to curb such actions.

However, “tax arrangements are a sovereign matter. The proposal is still far from becoming a reality,” he added.

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