China Reduces 'Business' Tax On Banks

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

17 January 2003

China's Tax Commissioner Jin Renqing yesterday announced that the business tax rate applying to domestic financial businesses would be reduced from 6% to 5% for this year - it had already been cut from 8% the previous year. The rate applies to banks, insurance companies and leasing companies among others and is levied on turnover; thus it has the nature of a sales tax for such companies.

Strangely, however, the government estimated that it would lose only 20 billion yuan (US$2bn) from the change, while ratings agency Fitch estimated that the banks alone could save as much as 100 billion yuan (US$10bn) this year under the new tax regime.

The banks have said that their effective tax rates are as high as 55-65% on profits as a result of the combined impact of corporation tax and the business tax, and have lobbied strongly for complete removal of the business tax.

It's a fact that such taxes usually mark only the early stages of conversion of state-run economies into market economies, and are necessary while concepts such as 'profit' and 'costs' are undefined in law and poorly understood by the bureaucracy. By now, Chinese tax collectors have progressed to a somewhat more sophisticated level.

Shanghai-based Bank of Communications spokesman Song Feng told the South China Morning Post: "We welcome the news. It would lower our overall tax burdens." He declined to say whether lobbying efforts would be made to further lower the taxes from the new 5% level.

Foreign companies are not subject to the tax; indeed, many of them pay just incentive rates of corporation tax that can be as low as 15%. Continuation of these privileged rates was confirmed earlier this week.

Ironically, the main driving force behind the tax reduction is the desire of the central government to force the banks to take provisions on dud loans to state organisations, and this they can't do while the banks' profits are scooped up by government. What the right hand gives, the left hand takes back!

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