March 8, 2017 2:08 am JST

China promises $50bn in fresh corporate tax breaks

New measures aim to lighten load on manufacturers, small businesses

ISSAKU HARADA, Nikkei staff writer

Chinese Finance Minister Xiao Jie laid out plans on March 7 to lighten the tax burden on businesses. (Photo by Akira Kodaka)

BEIJING -- Chinese Finance Minister Xiao Jie is promising 350 billion yuan ($50.7 billion) in corporate tax breaks this year, aiming to stimulate the economy and keep companies frustrated with heavy taxation from seeking greener pastures overseas.

The measures, targeting mainly manufacturers and small businesses, come on top of a tax overhaul that saved companies 570 billion yuan last year. "The goal is to further lighten the burden on companies," Xiao said in his first news conference since his appointment as minister last fall.

In addition to extending measures that were set to expire this year, Beijing plans to cut the value-added tax that fully supplanted the old sales-based business tax in 2016. The system now taxes gross profit -- or sales minus the cost of goods sold -- at 6%, 11%, 13% or 17%, depending on industry.

The leading proposal would eliminate the top bracket, though switching to a three-bracket framework with a lower top rate has also been floated. Whatever Beijing ends up doing is likely to reduce the tax obligations of manufacturers and other businesses now subject to the 17% rate.

The government aims to "create a fairer tax environment" and "expand the benefits of tax breaks," Xiao said.

The corporate tax rate on small and midsize enterprises also will be lowered. Companies will be permitted to deduct more research and development costs from taxable income, a measure intended to support research-oriented startups.

China is considering tax breaks for individuals as well, Xiao said. One proposal would let families claim a deduction for educational costs for a second child, as the government reverses the old one-child policy and tries to boost the birth rate.

In addition to tax-related measures, the government aims to slash by roughly 200 billion yuan the array of often poorly justified fees levied by local governments and other public-sector bodies. This would put the total reduction of taxes and fees from this year's planned measures at around 550 billion yuan, close to the scale of last year's savings.

These measures are a key part of the supply-side reform pursued by President Xi Jinping. Executives are taking a dimmer view of the heavy burden posed by taxes and fees. A glassmaker based in Fujian Province, for example, cited lower taxes to justify moving production to the U.S. last year.

Tax cuts and a cooling economy, however, are weighing on tax revenue growth, which slowed from 10-20% a year to just 4.3% in 2016, the least since 1990. The government will respond by cutting spending on lower-priority budget areas by at least 5%, Xiao said.

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