Chinese Premier Wen: Revise Export Taxes
At a special meeting of the State Council dealing with
taxation on October 10, Chinese premier Wen Jiabao asked
participating economists and officials to look at revising
tax regulations dealing with exports from China. In particular,
Wen asked that they consider abandoning tax rebates offered
to businesses which import raw materials, parts and components
to China for manufacture, and then export completed products
from the country.
Wen said that the current system is outdated, and is
no longer applicable in the present business climate.
Under the system, importers pay an import tax when they
import materials, but that tax is refunded when the completed
product is exported. The system in its implementation
is very complicated, with all kinds of complicated regulations
and formulas necessary to fugure out the exact amounts
of the rebates. For the Chinese government, it also creates
huge rises and drops in revenue prediction, and often
makes it difficult for the government to predict revenue
for budgeting. Adding to the problem is that the taxes
are collected and paid at the provincial government level,
which gives rise to frequent tax disputes between provincial
governments and the Chinese central government.
These regulations were introduced in the late 70s and
early 80s, just as China opened itself to foreign investment
and manufacture. At the time, the only investment incentive
China had to offer was cheap labor costs. As a result,
the tax rebates were offered to keep costs for manufacturers
to a minimum, and attract manufacturing investment.
Now, however, the regulations have become a nuisance.
Most businesses have already relocated their manufacture
to China, and in many sectors, China has become the factory
house to the world. This has opened China up to criticism
for the hollowing-out of many industries in other countries.
Recently, criticism has been particularly strong in the
US.
Also, there is less attraction for China to have export
incentives, as most of the growth is coming from China's
domestic market. There is no need for China to offer special
incentives to bring manufacturing into the country; now
many companies are bringing their manufacturing investment
into China because they want to be close to their main
growth market, not because of exports. This is particularly
true of the auto industry in China.
Abandoning the tax rebate system would bring China closer
in line to taxation systems in place in the developed
countries of the west, and in the G7 countries. This would
help to defuse some of the current criticism of China's
exports, and the dollar-yuan peg.
Opposition to this revision will come mainly from the
provincial tax bureaus, which will lose a major source
of revenue, and will lose an important bargaining chip
for negotiating revenue splits with the Chinese central
government.
Before you go, did you like this article?
If so, you can receive a free email newsletter version
each weekday. Sign up using the China Business Express
form on this page.
