China Total Tax Burden Second Highest in World

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Chinese capitalism seems long gone when viewed against actual fiscal policies

Sept. 26 – China’s tax burden is the second highest globally, beaten only by France, the 2009 Tax Misery Report by Forbes has suggested. Although relatively old data, the report has not previously gained much attention. However, as China has since then raised minimum wages and introduced social welfare payments for foreigners, the total tax and contributing burden by companies in China may now have overtaken European nations. It is possible that China has now become the most tax burdensome nation in the world.

The 2009 report took into consideration taxes and contributions including corporate income tax, individual income tax, social welfare, VAT and wealth tax (foreign companies in China must additionally pay dividend taxes if they wish to repatriate profits) and found that China is by far the most expensive country in Asia in terms of tax deductions. The top five most taxed nations were France, China, Belgium, Sweden and Holland. In Asia, China came out top in 2nd place, followed by Japan (15th), India (23rd), Vietnam (42nd), and South Korea (45th). The United States attained 48th position. India meanwhile is set to lower its rankings as both its corporate income tax and individual income tax rates are set to decrease when a new bill introduced to parliament passes into law, possibly next year.

The higher total taxes imposed by China reflect the nature of the continuing communist ideology, in which businesses are often targeted at producing increasing amounts of money for the benefit of the proletarian worker. The same is true, although not to the same degree, for Vietnam’s appearance in the top 50 most tax burdensome nations. Although China does have a massive population to consider, it still remains at its heart a heavily socialist nation, and is not as “capitalist” in terms of government policies as many tend to suggest.

The Zhejiang government’s Guorui tax yacht

Several Chinese commentators have stated that the report is not fair as many Chinese nationals do not even qualify to pay individual income tax. However, Forbes has rebuffed this by stating that China’s tax and contribution amounts are defined in law. The term “Tax Misery” was coined for the report by Forbes as opposed to “burden,” as it also recognizes that although the tax burden for China may be lower than that of developed countries, the tax misery measurement may still be high if the government fails to use tax revenues to provide higher quality and satisfactory public services. An indication of this can be gleaned from news reported by the China Daily in which Zhejiang tax bureau officials have justified the purchase of a US$424,000 luxury yacht in order to collect taxes from its eastern seaboard islands.

“At present, foreign investors feel as if they are suffering death by a thousand cuts in China,” says Chris Devonshire-Ellis, founding partner of Dezan Shira & Associates. “Foreign companies in China pay far more taxes and contributions than their local counterparts, even though the government says that as Chinese-invested businesses they should be treated equally. It is obvious to all that this is not the case. The current policies enacted by the incumbent government have stretched the resources of many foreign investors and are discouraging others from entering the Chinese market. While we understand the need for China to develop and raise the income level of its citizens, it seems to have introduced additional burdens at too early a stage, and needs to be aware it does face regional competition and is not as effective as it should be at domestic tax collection. As an example, to attract FDI in this economic climate, India is reducing taxes, just at a time when China is making itself less attractive. China needs to better balance its social responsibilities with its foreign investment needs and recalibrate the total expenses meted out if China is not to face a global retrenchment from its market. The new government next year may be inclined to rethink this policy.”

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6 Responses

  • The article above hints at it, but I would like to emphasize that the personal income tax in China is way lower than in the Netherlands; especially when you are using tax deductions. I do agree that taxes are being used for the wrong purposes and that’s why I am happy that I do not pay much tax at all.

  • @Thijs : For you yes, but your Chinese staff pay social welfare and so do their company, and you will too soon. Then it won’t seem so nice and low.

  • Chris Devonshire-Ellis says:

    The burden on foreign companies in China is getting high now. Even if you manage to work hard and be successful, the Chinese government taxes foreign companies more on profits. There’s an additional 10% on dividends (profits) if you repatriate overseas. That effectively makes profits tax in China 30% for foreign companies as against 20% for local businesses. Plus always increasing wages, welfare, labor unions, withholding tax, VAT…it all adds up. Then on top of all that which I pay because I own the business, I pay individual income tax on my salary at 45%. None of these are cheap tax levels. – Chris

  • Chouteau says:

    I think the reasons are not those… China has a huge administration to finance (wages, infrastructures, etc.) and the bank situation (highly in debts with junks investments from the provinces) need a higher injection of money.

  • Thomas says:

    Chris, CIT is 25% which will take the effective tax rate to 35% unless you are one of the few enterprises qualified for a lower tax rate and/or are located in a country for which a lower withholding tax on dividends is applicable (such as HK).

    Adding local taxes and all other costs of doing business you have already mentioned, China has its rightful place on top of the Tax Misery & Reform Index.

  • Chris says:

    There is no doubt that for compliant enterprises China’s tax burden is among the world’s highest. Of course, shockingly few Chinese enterprises actually pay tax at anything like these levels leaving the huge burden for foreign enterprises to pick up. From a governance perspective, ongoing minimization and evasion by Chinese enterprises means that every local boss (even in SOEs) is constantly on edge and fearful… just the way they like ‘em. Compliance in China is a fast path to bankruptcy.

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