BOFIT Viikkokatsaus / BOFIT Weekly 2017/18

China's tax code reforms last year involved bringing the remainder of service branches under the value-added tax (see BOFIT Weekly 18/2016). At the end of April, the State Council announced the elimination on July 1 of the 13 % VAT category, which includes agricultural products and natural gas. Both product groups shift to the 11 % VAT category, and just three VAT categories remain: 6 %, 11 % and 17 %.

Tax cuts on small firms were broadened at the start of the year and the tax-deductibility of R&D spending by certain scientific and technology firms has been extended for three years. Firms with taxable earnings of less than 500,000 yuan a year are now eligible for a tax break that allows them to pay a 20 % corporate tax on half of their earnings. The earlier ceiling for taxable annual earnings was 300,000 yuan. Some other temporary tax break programmes also continue.

The government estimates that its announced reforms will reduce the tax burden on firms and individuals this year by 380 billion yuan and reduce various payments by a total of 200 billion yuan. In March, premier Li Keqiang said that the move from the business tax to VAT reduced the tax burden on firms last year by a total of 570 billion yuan (€76 billion). However, combined VAT and business tax revenues increased last year by 4 % to 5.22 trillion yuan.

While China's 25 % corporate tax rate does not differ much from other countries, companies operating in China encounter other charges and fees that raise costs. The World Bank estimates that China's total tax rate of 68 % of commercial profits in 2016 (when mandatory contributions are factored in) is one of the world's highest. The World Economic Forum global competitiveness report finds China's rank near the bottom for indicators relating to business tax rates and the amount of red tape involved in starting a business. The problem has gotten traction lately and firms have begun to express dissatisfaction with the current situation. In February, the State Council directed government departments to examine their fees and other costs imposed on firms and eliminate those they find superfluous. The government hopes to have a nationwide list of fees levied on firms by the end of the year, as well as clear rules on when such fees are mandated.

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