China is responding to Washington’s tax overhaul by offering foreign companies a break on Chinese taxes in a bid to retain investment. The measure announced late Thursday is Beijing’s first major reaction to the US decision to cut corporate tax rates. It follows a flurry of promises by communist leaders to spur growth in the slowing, state-dominated economy by opening more industries wider to foreign companies. Foreign companies will be exempt from withholding taxes on profits they re-invest in industries specified by Beijing, the Finance Ministry and tax agency announced. It is retroactive to January 1, 2017, meaning companies would receive a refund on taxes paid this year. Beijing wants to “attract foreign investors after a host of countries unveiled similar measures to lure foreign and domestic investment,” the official Xinhua News Agency said.
The exemption will apply to companies that re-invest profits in industries cited in government investment catalogues, the announcement said. Those include solar and wind power, “green farming” and other fledgling fields in which Beijing is trying to develop technology. Supporters of the U.S. changes enacted this month say it will encourage investment in the United States. Governments including Canada and private sector analysts have warned that could draw money away from their economies. It was unclear whether China’s tax break was significant enough to influence investment decisions in emerging industries in which foreign companies complain they are shut out of promising areas or face pressure to hand over technology to potential Chinese competitors.
China has long been among the top global destinations for investment but foreign enthusiasm is cooling. Surveys by business groups show companies are shifting emphasis to other Asian economies seen as more profitable or less restrictive. The Organization for Economic Cooperation and Development ranks China 59th out of 62 countries in openness to foreign direct investment. Chinese official data show foreign investment into this country grew just 1.9 percent in the January-October period over a year earlier but jumped up in November.
However, Chinese economists say that is a poor measure of foreign interest because the bulk of it is money brought home by Chinese companies and disguised as foreign investment to gain tax breaks. China is a key market for autos, aircraft, smartphones, cosmetics and other goods. But Beijing bars foreign companies from fields including finance, telecoms and utilities. In others, companies are required to work through local partners that might become competitors.