China and Global Tax 15%

China has signaled its intent to adhere to the global project of establishing a minimum global tax of 15% on corporate income.

This project is in line with Beijing’s current tax strategies and is seen to be a counter to the tech giants with investments in tax havens or those that make use of Variable Interest Entities.

The proposed Global Tax rate of 15% will have an impact on the special administrative regions of China, Macau has a corporate income rate of 12% and Hong Kong has a rate of 16.5% (8.25% for lower incomes) however the effective tax rate is often lower due to the system of deductions and tax base that covers only income generated in the region. Mainland China has a corporate tax rate of 25%, with a lower rate of 15% for high-tech investments and in the less advanced Western provinces and Hainan Island.

There are additional special rates of 10% and 2.5% are dedicated to companies with profits of less than three million and one million yuan (400 and 130 thousand euros) however these do not fall within the group of large multinationals to be affected by the proposed global tax harmonization.

Low tax jurisdictions in Asia are primarily located in the Middle East, with both the United Arab Emirates and Bahrain having a 0% effective corporate income tax rate, while Qatar collects 10% and Oman and Kuwait levy a 15% tax rate on businesses.

In Southeast Asia the average corporate income tax is 20%, which allows Singapore to position itself as an ideal hub for business in the Far East with a 17% corporate income tax rate and other benefits which incentivize business in the region.

The proposed harmonization of a Global tax rate for corporation could impact regional investment strategies with multiple entities between China and other jurisdictions in Asia, favoring countries and regions with taxation above the threshold mark.

By adhering to the proposed Global Tax Rate, China will be able to tax the income of its multinational groups with a presence in countries with lower taxation. A Chinese company that generates foreign income in jurisdictions with taxes below the 15% threshold can be taxed in China thus dissuading the use of facilities in low-tax regions and countries. This will affect the frequent strategy of large technology groups which use special purpose vehicles in tax havens such as British Virgin Island or the Cayman Islands to make foreign investments, stock market listings and expansions into new regions.

In addition, Beijing’s cooperation with this economic development strategy promoted by the US in line with the OECD and G-20 countries and could be seen as a positive reconciliatory gesture in Washington and may be seen as a positive point in easing tariffs and trade wars.