China Reduces Business Tax For Domestic Financial Institutions

by Mary Swire, Tax-news.com, Hong Kong

06 April 2001

In response to complaints from China's financial institutions that the State gives an unfair advantage to their foreign rivals in the form of concessional tax rates, the Chinese Finance Ministry has announced plans to reduce the business tax for domestic banks and insurance firms by 1 percentage point each year from its current rate of 8 per cent to reach 5 per cent in 2003 in a bid to help them increase their profits.

The Chinese government has indicated that the new business tax reduction is an attempt to level the playing field for its financial institutions when they are likely to be faced from even tougher compeition from their foreign rivals when China enters the World Trade Organisation (WTO) sometime this year.

However, the new reduced business tax is likely to be of small comfort to China's finance sector as firms will still have to pay, on top of the business tax, a flat rate of 33 per cent income tax and a third tax on any income that is accrued above filed estimates compared to foreign firms which are subject only to a 15 per cent income tax.

Lian Ping, a researcher at the Bank of Communications, told the State media: 'Total tax levy on China's financial industry has been heavy compared with international standards, and the expanding size of the industry has generated significant taxes for the government.' Indeed, we reported earlier this week that China's Administration of Taxation had collected a colossal 305.828 billion yuan (US$36.94 billion) in the first quarter of 2001 which is up by 30.9 per cent on the same quarter of last year.' But, said Lian Ping, 'financial firms are crying over heavy tax burdens which have weighed down their profits.'

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