Surtaxes signal end of preferential tax policies for foreign investors

November 09, 2010 | BY

Candice Mak

Concentrate on tax policy transparency and consistent enforcement

The tax gap is now closed up between domestic and foreign investors.

On October 22 2010, the State Council issued a notice that repealed the tax exemption of two surtaxes on foreign-invested companies. Beginning December 1 2010, they will have to pay the urban maintenance and construction tax (UMCT) and the extra charges of education funds tax (EFT).

The repeal represents the elimination of the final major tax policy that offered preferential treatment to foreign-invested enterprises, foreign companies and foreign individuals. Peng Tao, a New York-based tax specialist of counsel at DLA Piper says this tax repeal is more symbolic rather than a substantial added burden to foreign investors.

“I do not think the repeal of the two surtaxes is the last straw to discourage foreign investment in the current environment,” said Tao. “While now the playing field is leveled, foreign investors would be more concerned about the transparency of the tax policy and the consistent enforcement of the tax rules among different locations.”

Now that China has established its reputation for foreign investment, offering overseas investors super national tax treatment is no longer essential. The imposition of the two final surtaxes is fairly minor compared to the earlier withdrawal of other more significant tax incentives such as the income tax holiday.

The UMCT and EFT are additional taxes imposed on the actual value-added tax, consumption tax and business tax. In total, the two surtaxes will add up to 10% of the VAT, consumption tax and business tax paid. The UMCT is 7% (if taxpayer is located in the city), 5% (township), and 1% (outside city or township), and the EFT is 3%.

Despite the relatively insignificant tax amounts, they will still be helpful for revenue collection. “ It still has meaningful effect on generating income, in particular for local governments since the tax revenue collected from the two surtaxes will become the fiscal revenue of the local government authorities,” said Tao.

Contrary to other English-language media reports, the UMCT and EFT exemptions were available to foreign investors when they were introduced in 1985 and 1986 respectively. “The 1994 tax notice just reiterated that such tax exemption shall be continued until the State Council provides otherwise,” noted Tao.

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