Are firms paying very high rate of tax?
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