China's Tax Reforms Will Reduce Government's Role In Economy

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

09 February 2004

As China begins to implement its bold tax reform plan this year, a senior government figure has described the radical reforms, designed to stimulate economic investment, as something akin to “Reaganomics”.

"We feel that only through simplifying things and lowering tax rates will revenue collection become more efficient. At the same time, we also want to give fuller play to companies," observed Deputy Finance Minister Lou Jiwei in an interview published in the Wall Street Journal last week. He also explained that the government wants to take more of a back seat role in fueling economic growth. "It's a lot like Reaganomics," the Deputy Finance Minister noted.

Whilst the new regime will relieve the tax burden for many domestic firms, taxes are likely to increase for foreign companies who have previously enjoyed a discretionary discount well below the nominal 33% rate that should, in theory, apply across the board. "The aim is to find a balance point between the 33% nominal rate and the 20% actual rate," Mr Lou commented.

However, the minister conceded that the aggressive drive to develop new investment through tax incentives also has negative consequences. Giving an example, he referred to the risk of overproduction in the steel sector. "We don't feel the Chinese economy overall is overheated, but some sectors are showing some structural problems," he told the WSJ.

He added: “If we complete all our steel investment projects, the [annual] total capacity will be 300 million tons. Is there such a big market in the world? We're quite worried about that."

Recommended