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Should China Fear US Tax Reform? Not Really - Natixis

In view of analysts at Natixis, the completion of US tax overhaul has created heated debate globally and China is no exception.

 

Key Quotes

 

“With the reduction in the US corporate tax rate, many fear that Chinese firms, or at least US companies operating in China, may flee to the US to enjoy the newly released tax benefits.”

 

“We argue that this is highly unlikely for the following reasons.

Although China’s officially standard corporate tax rate is 25% but this is really a maximum and there are a number of ways to get a lower one.

Even when including the value added taxes, China’s effective tax rate is only 17%, which is much lower than the US new corporate tax ratio alone.

Most Chinese local governments still give implicit subsidies to large investors to compensate for their losses in tax. If companies were to consider leaving for the US, Chinese local government can easily increase their subsidies to buffer the negative effect.”

“As for China’s response, one should recognize that the current fiscal situation does not offer China much room to substantially lower its effective corporate tax rate across the board. However, China can still afford to lower the corporate income tax rate for foreign companies only as it constitutes a very small part of the tax base. In fact, China has already announced a temporarily exemption for foreign firms from taxes for reinvested profits. Still, given that most firms do not actually pay the standard tax rate, it this will not change the current effective corporate tax too much except for a positive signaling effect.”

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