China’s Tax Reform Should Suit Its Own Needs, Financial Journal Argues

China’s Tax Reform Should Suit Its Own Needs, Financial Journal Argues

Dou Shicong

Date: Wed, 12/06/2017 - 19:59 / source:Yicai
China’s Tax Reform Should Suit Its Own Needs, Financial Journal Argues
China’s Tax Reform Should Suit Its Own Needs, Financial Journal Argues

(Yicai Global) Dec. 6 -- The US Senate recently passed the Tax Cuts and Jobs Act proposed by President Donald Trump.

As the most substantial amendment to US tax law in over 30 years, the bill will slash the corporate rate from 35 percent to 20 percent.

Chinese newspaper Financial News, an affiliate with the People’s Bank of China (PBOC), published an editorial on the matter, stressing that China should develop its own tax reform based on the actual needs of the country, rather than roll out tax cuts in mimicry of the US. The US tax reform aims to lower operating costs for domestic businesses and will cause a certain amount of American capital to return to the country. Given the close economic and trade ties between China and the US, the policy will certainly impact the Chinese economy, the newspaper reported today, quoting Liu Xuezhi, a senior analyst at Bank of Communications Co. [SHA:601328], as saying.

Several countries have introduced tax cut plans. The UK government, for example, declared that it would slash the corporate income tax from 20 percent to 17 percent by 2020, and France and India have also announced similar plans. Some market insiders believe that China should also prepare for further tax and cost reductions.

China’s tax reform should develop based on the actual situation in the country, instead of following the US lead, Liu suggested. The world’s second-largest economy is amid an economic transition, and the government is under increasing financial pressure. A sudden reduction in major tax rates would inevitably undermine the effectiveness of national fiscal policy, he argued.

The two countries have different tax systems. While most taxes in the US are direct taxes, China’s are primarily indirect. The country moreover derives only 50 percent of government revenues from taxation, in contrast to over 90 percent in the case of the US government, noted Liu Shangxi, director of the Chinese Academy of Fiscal Sciences.

Tax cuts in China mainly take the form of replacing sales taxes with value-added tax (VAT), a tax reform measure introduced in May last year. The total amount of taxes paid by enterprises fell by CNY1.1 trillion (USD160 billion) over the first nine months of this year. By expanding the tax base, the government has reduced the tax burden on businesses, and at the same time increased fiscal revenues despite the lower tax rates, Liu explained.

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Keywords: MSCI, pboc, Tax Reform, Added-Value Tax