Are firms pay­ing very high rate of tax?

China Daily (Canada) - - VIEWS -

Acou­ple of weeks ago, Chi­nese auto-glass ty­coon Cao De­wang sparked a heated dis­cus­sion across China. Cao said his re­cent $600 mil­lion in­vest­ment to es­tab­lish a man­u­fac­tur­ing branch in the United States for his com­pany, Fuyao Glass In­dus­try Group, was driven largely by China’s high taxes, which he claimed are 35 per­cent higher for man­u­fac­tur­ers in China than in the US. Has the tax bur­den on Chi­nese en­ter­prises re­ally reached eco­nom­i­cally lethal lev­els?

Go­ing strictly by the num­bers, this does not seem to be the case. Mea­sured as the ra­tio of the gov­ern­ment’s fis­cal rev­enue to GDP, China’s over­all tax bur­den, ac­cord­ing to the In­ter­na­tion­alMone­tary Fund’s Gov­ern­ment Fi­nance Statis­tic­sMan­ual, is just over 29 per­cent. That is 10 per­cent less than the global av­er­age.

Another way to mea­sure the over­all tax bur­den is to cal­cu­late the ra­tio of tax rev­enue and so­cial se­cu­rity con­tri­bu­tions to GDP. By that mea­sure, China’s av­er­age tax bur­den from 2012 to 2015 was 23.4 per­cent, or 12 per­cent lower than mem­ber coun­tries of the Or­ga­ni­za­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment. As a per­cent­age of GDP, China’s tax rev­enues amount to about 18 per­cent— com­pared to about 26 per­cent of GDP in de­vel­oped coun­tries and about 20 per­cent in de­vel­op­ing coun­tries (in 2013)— and con­tin­ues to de­cline.

Yet not ev­ery­one agrees that China’s tax bur­den is rel­a­tively low, es­pe­cially at the com­pany level.

So what is the ac­tual tax bur­den on Chi­nese en­ter­prises? Of­fi­cially, Chi­nese pro­duc­ers must pay an en­ter­prise in­come tax of 25 per­cent. But many en­ter­prises get tax in­cen­tives. For ex­am­ple, high-tech en­ter­prises sup­ported by the gov­ern­ment pay an in­come tax of just 15 per­cent, while some small-scale en­ter­prises pay 20 per­cent. I would there­fore es­ti­mate the me­dian rate of cor­po­rate in­come tax is about 20 per­cent.

Com­pa­nies must also pay val­ueadded tax of 17 per­cent, though there are op­tions for pref­er­en­tial rates of 13 per­cent, 11 per­cent, 6 per­cent, and even 3 per­cent. That puts China more or less in the same range as other VAT coun­tries.

To find out how these rates trans­late in the real world, I col­lected data (com­piled by a Bei­jing news re­porter) from two well­known Chi­nese man­u­fac­tur­ers, Gree Elec­tric Ap­pli­ances and Canny El­e­va­tor. Ac­cord­ing to Gree’s 2015 so­cial re­spon­si­bil­ity re­port, it paid about 14.8 bil­lion yuan ($2.1 bil­lion) in taxes in 2015. Its to­tal rev­enue amounted to more than 100.5 bil­lion yuan, and its net profit was about 12.5 bil­lion yuan. The to­tal taxes paid ac­counted for 14.7 per­cent of Gree’s to­tal in­come, or 1.18 times its net profit.

As for Canny El­e­va­tor, its an­nual re­port showed that it paid 336 mil­lion yuan in taxes and du­ties in 2015. That is about 10.27 per­cent of the com­pany’s rev­enue for the year (which to­taled 3.27 bil­lion yuan), and 68.8 per­cent of the year’s net profit (which stood at 488 mil­lion yuan).

These might be taken as ev­i­dence of a heavy bur­den of tax and du­ties. But it re­mains un­clear if these fig­ures are in line with what most Chi­nese com­pa­nies pay. Af­ter all, lo­cal gov­ern­ments of­ten of­fer tax re­turns, re­funds and breaks, mean­ing that the tax bur­den varies greatly across en­ter­prises, in­dus­tries and re­gions. And that does not even ac­count for ram­pant tax eva­sion by small com­pa­nies.

That said, the per­ceived “tax bur­den” in China also in­cludes non-tax ex­penses, in­clud­ing a rel­a­tively high pro­por­tion of so­cial insurance paid for work­ers, the ac­tual cost of land, re­sources and fi­nanc­ing, as well as a va­ri­ety of gov­ern­ment sur­charges. And, in­deed, Cao cited China’s high land costs (as well as soar­ing la­bor costs) as ad­di­tional fac­tors driv­ing his com­pany’s par­tial move to the US.

Gov­ern­ment sur­charges alone amount to at least 13 per­cent of Chi­nese en­ter­prises’ rev­enues, with some 7 per­cent fi­nanc­ing ur­ban con­struc­tion and main­te­nance, 5 per­cent go­ing to ed­u­ca­tion, and 1 per­cent ear­marked for flood control. Such fees, paid to lo­cal gov­ern­ments, must come from profit, and can­not be passed on to con­sumers.

This has con­trib­uted to the ero­sion of Chi­nese com­pa­nies’ profit margins, which, ac­cord­ing to TCL Corp Chair­man Li Dong­sheng, have dropped to less than 2 per­cent, on av­er­age. Man­u­fac­tur­ing sur­charges there­fore amount to nearly a quar­ter of profit, putting a fur­ther squeeze on low-profit man­u­fac­tur­ers.

While it is im­pos­si­ble to es­ti­mate the pre­cise size of Chi­nese com­pa­nies’ tax bur­den, they feel un­der pres­sure. At a time of slow­ing eco­nomic growth, the last thing China needs is to drive more pro­duc­ers away. To pre­vent this, China needs to cre­ate a more straight­for­ward and trans­par­ent tax sys­tem, with a tran­si­tion to more ex­plicit and di­rect tax­a­tion. Taxes, du­ties and fees for busi­nesses must be low­ered, as should the share of so­cial insurance paid by com­pa­nies for their em­ploy­ees in China.

The au­thor is a pro­fes­sor of Eco­nomics at and di­rec­tor of China Cen­ter for Eco­nomic Stud­ies at Fu­dan Uni­ver­sity. Project Syn­di­cate

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