By Lee Hyo-sik
China’s move to scrap tax breaks and other incentives for foreign companies will likely hurt Korean firms operating in the world’s second-largest economy.
The change, which will likely take effect this month, is also expected to discourage local companies from making inroads into the mainland.
According to the Korean International Trade Association (KITA), Wednesday, the Chinese State Council, China’s highest administrative decision-making body, gave an order to municipal administrations across the country in December to remove tax cuts and other favorable treatment extended to foreign businesses.
The council argued that local governments’ “excessive” competition to attract foreign investment has aggravated their financial health, requiring them to streamline their tax regimes. Municipal governments were also asked to file a report by March on how they would end the preferential policies for non-Chinese businesses.
“China’s local governments were engaged in competition to offer larger benefits to attract foreign companies,” said Choi Yong-min, the head of KITA’s Beijing office. “However, they are forced by the central government to drop tax cuts and other benefits for foreign firms. I think most of them will announce the abolition of preferential measures this month.”
Korean and non-Chinese firms operating in the nation as a result will face higher taxes and pay more for plant sites they leased from local governments, among others, according to Choi.
Before 2008, foreign companies in China faced a 15 percent corporate tax rate, while Chinese firms paid 33 percent of their income as taxes. But since 2008, both Chinese and non-Chinese companies face a 25-percent corporate tax rate.
In the absence of the corporate tax benefits, municipal administrations have slashed other taxes and offered other incentives to foreign companies.
“The removal is to increase the costs of doing business in China and will discourage local firms from setting up a presence there,” Choi said. “I think the Chinese government should have offered a grace period so that companies have more time to adapt to changing environments.”
Despite the abolition of the incentives, however, Korean firms should remain in the world’s fastest-growing economy, he said, adding that China has become an important consumer market.
“China has lost its appeal as a production base. But it has become an attractive consumer market. So, companies manufacturing consumer goods should expand their operations,” Choi said. “Businesses are advised to be cautious when investing in China. They should not trust what Chinese government officials say. They must secure a legally-binding contract and other legal documents so that they can minimize costs when a problem arises.”