At a dinner over hairy crabs a few days ago, I was discussing Chinese taxes with a group of visiting Italian logistics managers. A Chinese manager at the meeting complained about high taxes and fees but after the Italians heard what the tax rates actually were, the conversation took a different tack entirely.
Sure, an increase from 15 percent to 25 percent is big jump high. But compared to the tax rates in other countries – especially Europe – the 25 percent starts seeming like a pretty low number.
And, as Sherisse Pham explains in this week’s article about Aoxing Pharmaceutical, some foreign companies are able to lock in the previous 15 percent rate for a little while longer.
For Chinese companies, the tax rates are falling – from 33 percent to 25 percent – thus leveling the playing field for domestic and foreign firms.
I have friends who are Russian businessmen who came to China because the tax situation is so friendly. It is possible to do business legally in China, paying all taxes and fees, and still make a decent profit. In Russia, by comparison, taxes can sometimes add up to more than 100 percent of income.
Sure, some people do avoid paying their taxes. Eventually, the “fapiao” system of tax receipts needs to be replaced with the standard international system, where any invoice or receipt or cancelled check can be used as documentation of a business expense – and all revenues are taxable, whether a company issues a fapiao for them or not.
However, even with its problems, China’s tax structure – and collections – are improving dramatically.
Earlier this month, China’s State Administration of Taxation reported that tax revenues went up 30.8 percent — to 3.72 trillion yuan (US$495.5 billion) — in the first three quarters of this year. That’s the highest growth rate for the same period since 1994, according to Xinhua.
It’s also about three times higher than the rate at which the economy as a whole grew.
Corporate income tax revenues rose even more, by 35.8 percent.
Clearly, somebody out there is paying more taxes than they paid last year.
Equalizing taxes between foreigners and locals can only encourage that process, as a basic unfairness in the system is eliminated.
And much of the taxes that are collected do go for pretty decent purposes – infrastructure, education, health care. This creates a virtuous cycle – better infrastructure and education helps business, which in turn further expands the tax base.
Now that the government has lowered the tax rate, it should make it easier to track receipts. Today, taxi cabs and Starbucks restaurants already issue receipts which are official tax documents, so it is possible to integrate tax collections into general operations. But the supermarket chain downstairs forces customers to go to the customer service window to get a tax receipt. It’s very doubtful that more than a small percentage of customers will ever bother doing that.