China Urged To Cut Investment And Tax Incentives

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

24 April 2006

China must end its traditional reliance on tax and investment concessions to encourage export-driven manufacturing business, and instead concentrate on developing its domestic service-orientated sector, the World Trade Organisation said in its first formal review of China's trade policies.

Ongoing trade and structural reforms, given added impetus by China's membership of the WTO since 2001, have made it the world's third largest trader and one of the largest FDI recipients, the WTO said in a report published last week.

While trade and investment barriers have declined considerably, in part due to WTO commitments, the report noted that nevertheless, the Government continues to intervene to “manage” trade, including for domestic supply considerations.

Many foreign companies are encouraged to do business in the country by significant tax breaks offered by the government, with the biggest tax concessions going to investors in certain favoured industries. However, the WTO warned that such preferential treatment runs "the risk of subsidizing good investments, which might have been undertaken in any event, or turning bad investments into profitable ones".

The report suggests it may be necessary to reappraise the current policy to attract investment to export-oriented capital intensive manufacturing, and to place greater emphasis on removing impediments to the expansion of the services sector.

Responding to the report, the Chinese government says that it has fully implemented the commitments it made when joining the World Trade Organization (WTO) in 2001.

According to Vice Commerce Minister Yi Xiaozhun, China's average tariff level on industrial goods has been lowered to 9.1 percent from 14.8 percent before its WTO accession. Meanwhile, agricultural tariffs have been cut from 23.2 percent to 15.3 percent, he stated.

China has also opened up 10 service sectors and 100 sub-sectors, including banking, insurance, distribution, telecoms, legal services and accounting, to levels prescribed by the WTO, Yi told members of the organisation last week.

Yi added that furthermore, China has also reviewed its trade laws and brought them into compliance with WTO norms, and made has significant progress on the issue of intellectual property.

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