BEIJING >> China said today that it would temporarily exempt foreign companies from paying tax on their earnings, a bid to keep U.S. businesses from taking their profits out of China following Washington’s overhaul of the U.S. tax code.
There is, however, a catch: To be eligible, foreign companies must invest those earnings in sectors encouraged by China’s government — including railways, mining, technology and agriculture — according to a statement from the Finance Ministry. The measure is retroactive from Jan. 1 this year, the ministry said.
The move would “promote the growth of foreign investment, improve the quality of foreign investment and encourage overseas investors to continuously expand their investment in China,” the ministry said. It did not elaborate.
Despite its appeal as a manufacturing hub, one where companies from around the world have set up operations to tap into a highly skilled workforce and strong infrastructure, China charges high taxes. On top of a standard corporate rate of 25 percent, companies are required to make social security contributions and other payments that push their tax burden higher than it is in many other countries.
The newly approved tax incentives in the United States could appeal to companies that are frustrated by China’s rising labor costs, ambitious local competitors and tangled legal systems, or those that would rather spend their money at home or elsewhere. And officials in Beijing have worried that the overhaul could prove to be a challenge to Chinese laws that aim to keep money from leaving the country’s borders.
While Thursday’s announcement did not explicitly refer to the tax overhaul in the United States, analysts have said that it is almost certain that the policy was in response to it. This month, China’s vice finance minister, Zhu Guangyao, pledged to “take proactive measures” in response to the overhaul, according to Xinhua, China’s state-run news agency. He noted that the impact of the changes overseas “cannot be overlooked.”
The U.S. tax overhaul has been promoted by President Donald Trump and other Republican leaders as a move to make the United States more competitive globally. In particular, the new corporate tax rate is sharply lower, moving the country from having among the highest corporate tax rates to among the lowest. Under the bill approved by Congress, the rate would go to 21 percent from 35 percent.
But ministers, officials and analysts in much of the rest of the world have said it could create an uneven playing field and set off a race among countries to cut corporate taxes. Because the United States already offers a large and wealthy domestic market, relatively light workplace regulation and large amounts of venture capital, lower tax rates had been one lever that other countries had used in an effort to lure companies.
Asian and European officials have speculated that some of the measures in the revamped tax code could help encourage U.S. companies produce goods domestically for exporting. European leaders, for their part, have raised the specter of a trade battle and implied they may challenge the overhaul before the World Trade Organization.
China, meanwhile, has had its own concerns.
Many American and European companies have complained in recent years that the country is becoming an increasingly difficult place to do business. Firms say they have had to navigate tricky new laws, been subject to forced technology transfers, and have complained that authorities curtail their access to Chinese consumers.
China sets tight rules on how much money flows out of the country, as a way of controlling the value of its currency and keeping its financial system stable. A significant repatriation of foreign earnings could set off a broader capital flight, and weaken the country’s currency, the renminbi. And a sharp fall in the renminbi could spark a vicious cycle with even more companies — and possibly individuals — looking to minimize losses by moving their money out of China.
The currency controls, which were tightened last year as Beijing tried to stem a tide of money leaving the country, have led to complaints from foreign companies doing business there.
It is, for the moment, unclear how much money U.S. companies actually keep in China, or how much they would seek to bring home. Many businesses use complex accounting techniques to book profits overseas, and firms with major investment plans in China could elect to keep their money here regardless.
Regardless, business lobbying groups here said it was unlikely that the Chinese government’s latest measures would be significant enough to keep many U.S. companies from repatriating profits.
Jake Parker, vice president for China operations at the U.S.-China Business Council, said some of his member companies had already said that they would seek to repatriate China earnings to the United States with the tax code change, and were considering doing so quickly to minimize the risk of being subject to capital controls.
“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,” Parker said.