Domestic and foreign companies treated alike
PETALING JAYA: Beginning today, China's new enterprise income tax law comes into effect, sweeping away a host of preferences and tax holidays for foreign-invested and foreign enterprises in the country and treating them equally with domestic enterprises.
The new law, which does not apply to Hong Kong and Macao, was introduced to bring China's tax system up to international standards to provide a level playing field for domestic and foreign enterprises. It also conforms with the standards of the World Trade Organisation and will enhance tax administration.
The new law also shifts emphasis on incentives on a nationwide scale, rather than regional, and stresses on high technology and other value-added services. It also looks more favourably on those companies entering the agricultural sector.
One of the main features of the law is the reduction in corporate tax rate for foreign-owned or invested enterprises to 25% from 33% under the old tax regime. Another feature is the withholding tax of 10% on dividends repatriated as well as a further withholding tax of 10% on interest, royalty and gains from disposal of shares to non-residents.
For foreign enterprises – including Malaysian – there may be a need to restructure the way they do business in the country or a need to relocate to a friendlier tax jurisdiction, according to Deloitte KassimChan Tax Services Sdn Bhd executive director Yee Wing Peng.
He said Malaysian companies were mainly invested in the manufacturing sector while others were invested in infrastructure assets, such as power plants and highways.
In recognition of the issues or problems posed by the new corporate tax regime, Deloitte will be holding a two-day seminar on Jan 15–16 entitled “Tax strategies for overseas projects and investments,” covering several countries in the region, including China.
Yee said there was also a need to review the investment holding structure and supply chain of a company. “Companies should evaluate whether there's a need to invest in the country directly or should they invest in China via Singapore or Hong Kong due to the reciprocal treatment between jurisdictions, especially for repatriating profit,” he told StarBiz.
Yee said that due to the law and the increasing costs of doing business in China, it would be better to look elsewhere in the region if the corporation or enterprise had no specific business objective to achieve.
“China's tax incentives under the new corporate tax regime are not as generous as before, even in the value-added services such as high technology-intensive industries. It may be better to relocate to Malaysia where enterprises in these industries enjoy long-term exemptions and incentives,” he said.
Depending on the type of industry an enterprise involved in, there were other countries in the region with more favourable tax regimes, Yee said, adding that South-East Asia, in particular Vietnam, was an ideal investment destination.
He said there was now also a new anti-tax avoidance feature in the law. “The Chinese tax authorities may disregard any tax-efficient structure that is in place and just collect the tax and they may also impose a penalty,” Yee said.
He said even if a foreign enterprise did not have a presence in China but created business in the country they might be taxed based on the argument that the presence of the foreign enterprise's employee(s) created an establishment and would, therefore, be subjected to the same tax rate.
For those countries without a tax treaty with China, they run the risk of getting taxed. “In this respect, Malaysian enterprises are protected because there's a tax treaty with China, so anything less than six months is all right,” Yee said.
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