Withholding tax shift keeps China competitive: KPMG
BEIJING, July 16 – China is relaxing its dividend withholding tax rules for foreign firms operating in the mainland, a move that could save companies billions of dollars and make the country a more attractive business location, a tax expert said today.
Beijing is loosening its strict interpretation of double taxation treaties, assuming that listed corporations and other entities claiming tax relief under such arrangements now automatically satisfy conditions they previously had to prove.
“The amount of tax saving achieved under tax treaty relief could be significant, but as important will be the greater degree of clarity going forward,” Khoon Ming Ho, partner-in-charge of tax at KPMG China, said.
Hong Kong-based Ho said the easier interpretation would help create a more friendly environment for foreign investors.
“The availability of tax relief can reduce the cost of operating in China and can help offset rising costs elsewhere, such as labour costs,” Hong Kong-based Ho said.
Chinese tax law demands foreign firms operating in the mainland pay a 10 per cent withholding tax on dividends. That falls to 5 per cent if companies meet criteria that define them as being of “substance” in the treaty jurisdiction in which they claim relief – generally a measure of operational size.
KPMG, citing official data, says repatriated dividends were worth US$64.8 billion (RM) in 2011 and withholding tax collected by China amounted to the equivalent of about US$8.6 billion – around 52 per cent of all corporate income tax paid by foreign firms in the country last year.
China established its treatment of so-called beneficial ownership of dividends under double taxation treaties in 2009.
Two recent statements issued by the State Administration of Taxation – one on June 19 and the other on July 13 – provide the latest guidance on how Beijing is interpreting the rules.
Ho said the timing of the new announcements was good for corporate tax payers as firms are likely to be in the process of applying for foreign currency to repatriate after completing tax returns and financial statements for the 2011 year in late May.
China’s capital account controls place strict limits on the amount of foreign exchange that can be brought in and taken out of the country in each calendar year.
But a series of liberalisation measures over recent months have been designed to ease cross-border flows of funds in a bid to make access to capital faster and cheaper and in turn keep the world’s second biggest economy competitive.
China is facing substantial competitive pressure from its Asian neighbours, with mainland labour costs lately rising by 20 per cent or more annually, forcing Beijing to adopt new strategies to keep its economy growing – both through economic reform and encouraging firms to rise up the value chain. – Reuters