Chinese Shares Fall After Beijing Tax SNAFU

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

11 July 2007

Hong Kong and mainland shares in nine major Chinese state-owned companies fell last week when it became known that the government would probably seek to reclaim back taxes from them after abolishing a preferential 15% rate of corporation tax they have been paying since 1993.

The tax break was originally gifted to assist the nine companies to list in Hong Kong, but is being removed as part of the government's plan to level up taxation of domestic and foreign companies.

The State Administration of Taxation last week ordered local tax authorities to cancel the preferential profits tax arrangement with immediate effect. The companies are: Sinopec Yizheng, Sinopec Shanghai Petrochem, Dongfang Electrical Machinery, Tsingtao Brewery, Jiaoda Kunji High-tech, Beiren Printing, Maanshan Iron, Guangzhou Shipyard and Tianjin Capital.

Some of the companies had been paying the higher tax rate of 33% for the last few years, in any event, but there is doubt over the years after 1997. Most of the companies said that until now they had received no notice of any change, but accountants said they would still have to make provisions in this year's accounts for back taxes under international accounting rules.

Tianjin Capital said it has been paying 33% percent corporate income tax since 2001 and that, therefore, the latest move by the tax department would have no impact on its future production and operations.

The privileged companies, excluding Tianjin Capital, have said they are communicating with the tax authorities to assess the situation, which is highly complex. It is likely that the companies will lobby regional governments, which are responsible for tax collection, to let them off some or all of the back taxes. Some analysts pointed out that it was unfair to penalize external shareholders in the companies for inconsistencies in government policy.

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