Caixin
Jan 04, 2018 12:06 PM
ECONOMY

China Now Taxes Offshore Profits Less

China is now effectively taxing less on repatriated offshore earnings for all companies and individuals.

The new policy is seen as similar to the U.S. recent tax cut plan, as both aim to encourage companies and individuals to bring more profits back to the home country, industry insiders say.

Retroactive to Jan. 1, 2017, Chinese companies and individuals have more flexibility in determining the part of their repatriated profits eligible for income tax exemption at home, the Ministry of Finance and the State Administration of Taxation (SAT) said in a joint statement Friday.

The changes are part of the measures the State Council, China’s cabinet, said in August that it would assign affected departments to draft to boost inbound as well as outbound investment.

First, combined income taxes paid to all foreign countries can be claimed as credit against income taxes otherwise due in China, which is known as “overall limitation,” according to the statement. Previously, such credits could be calculated only on a per-country basis.

Previously, they could calculate such credits only on a per-country basis.

The overall-limitation clause, originally applied to the oil industry in 2011 in China, now has expanded to cover all sectors.

Second, dividends received from up to five layers of foreign subsidiaries can be used for calculating tax exemptions in China, compared with just three levels before, as long as the Chinese parent maintains shares in the subsidies above certain amounts, the statement said.

The overall-limitation clause will “effectively lower the overall tax burden on companies’ overseas income” as it enables firms that invest in multiple countries to “balance their tax burdens in different nations and regions” and increase their tax credit in China, unnamed Finance Ministry and SAT officials said in another statement Tuesday.

Meanwhile, the extension of the number of subsidiaries to be benefited from the tax incentive will “encourage Chinese companies to go abroad to acquire foreign resources, market and technologies,” they said.

Andrew Choy, Greater China international tax leader of accounting firm Ernst & Young, said the policy is in “the same direction” as the U.S. tax overhaul, which intends to encourage American firms to bring their overseas cash back home.

“The main purpose of the policy is to expand and optimize the coverage of the overseas income tax breaks so that Chinese companies can benefit from it as much as possible and will not be taxed again at home after they pay the levy abroad,” he told Caixin. “The marginal effect of the move is equivalent to the U.S. tax cut.”

He added that the policy also aims to support Chinese companies’ overseas expansion in the long run, particularly as the government encourages investment in projects in the “Belt and Road” initiative.

Many Chinese companies make foreign investment through multiple layers of offshore special purpose vehicles, with the first level under the parent firm often set up in Hong Kong, which is close to the mainland but does not have capital account controls like Beijing, he said. Allowing more layers of subsidiaries to benefit from the tax break will increase the flexibility of Chinese companies when they design the share-holding structure of their overseas projects, he said.

Chinese authorities have been prompted to act after the U.S. and other countries changed their tax rules to attract and keep foreign investments. Authorities were concerned that such moves could make China less attractive as an investment destination and potentially lead to capital outflows

On Dec. 28, the Chinese government announced that it was temporarily waiving a 10% tax that the country has slapped solely on foreign companies’ profits from equity investments if the earnings are plowed into government-targeted sectors. The tax break was also retroactive to the beginning of 2017.

Contact reporter Fran Wang (fangwang@caixin.com)

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