Moody’s Says U.S. Tax Cuts To Have Minor Impact on China

The recent overhaul in U.S. tax laws is not expected to have major implications for the world’s second-largest economy, according to a report from Moody’s Investors Service.

The Trump administration’s tax bill, which was signed into law in December, reduces the corporate tax rate to 21% from 35% and offers a one-time 15.5% tax rate on overseas cash brought home, among other adjustments to both individual and corporate taxes. However, the sweeping new measures are unlikely to have “material credit implications” for China and Chinese companies, according to a note from Moody’s released on Wednesday.

The tax cuts will only have a modest effect on economic growth, adding one-tenth to two-tenths of a percent to U.S. gross domestic product, and thus are not expected to increase demand for Chinese exports, said the report, adding that any positive impact would likely be offset by increasing trade tensions.

Lower taxes are unlikely to affect investment plans by Chinese companies, which are impacted by a number of factors including domestic government policy, the note read. China has also demonstrated it has the ability to control outflows through capital controls.

China’s official corporate tax rate is 25%. However, foreign companies often benefit from preferential tax policies from different levels of the Chinese government, so it is unlikely they will be taxed at a rate higher than the new U.S. corporate tax rate, according to Moody’s.

In late December, China waived a 10% tax on foreign company profits from equity investments to encourage them to keep their earnings on the mainland.

China also appears open to introducing other measures to limit the impact of the U.S. tax overhaul.

In an article published after the 19th Party Congress in October, Finance Minister Xiao Jie wrote: “We will closely follow developments in tax reforms worldwide, prudently assess and identify trends in international tax regimes and further improve (China’s) corporate income taxation” as part of efforts to “beef up the international competitiveness of the country’s tax system.”

Contact reporter Liu Xiao (liuxiao@caixin.com)