2010-12-01 16:17

BEIJING - Foreign companies in China have to face a new reality - fewer tax incentives. Despite higher costs, many investors have recently said they could not afford to lose a lucrative market like China.

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As of Dec 1, China begins to charge foreign companies two taxes, which helps finance local city maintenance, construction and schools. Domestic firms now pay this tax.

This means foreign companies will now have to pay equal taxes with their Chinese counterparts.

More than thirty years ago, China introduced the economic reform and opening-up after decades of economic deadlock. In urgent need of foreign exchange and technology, the government put into place an array of favorable policies to attract foreign investment.

Among them were hefty and exclusive tax breaks for foreign investors.

Now, however, as China has gradually shifted to a market economy, there are stronger calls for equal treatment of foreign and domestic firms.

In fact, China's legislature passed a law in 2007 to unify the corporate income tax rate for foreign and domestic companies at 25 percent.

However, much complaining followed the new law. Some argued that the new policy was "unfriendly". On the other hand, others said they would learn to adapt to the new environment, as they pin greater hopes on China after they saw faster business growth in recent years in the world's fastest-growing economy.

"We do feel the changing environment in China, as we are faced with higher costs from tax rates, labor wages and stronger Renminbi, said Takeshi Uragami, general manager of Panasonic Electronic Devices (Qingdao) Company, Ltd., which is among the first group of foreign companies to open business in China in the early 1980s'.

Before the corporate income tax rates were practically equalized in 2008, foreign firms were charged a 15 percent rate at the time, while domestic businesses paid 33 percent.

"It is nothing surprising," said Yang Wonjun, general manager of the Qingdao New Century Tool Co, Ltd, a South Korea-invested cutting tool manufacturer based in the east coastal city of Qingdao.

"Favorable policy is good, but we did not count on it being perpetual. We have prepared for the changes," he said. Unified tax rates is a popular practice in many countries, and is unstoppable in China, he added.

Although tax rates are no longer appealing, foreign investors said they would not leave China. Further, they would invest more in China, as they are confident that they would profit more even at the cost of higher taxes.

Data released by the Ministry of Commerce showed Foreign Direct Investment (FDI) rose by 8.7 percent year on year in October to $7.66 billion,the 15th consecutive monthly gain.

"At any rate, we can not resist the temptation of China, because it is such a strong economy with relatively cheaper labor costs and huge markets, while few other countries have such advantages," Takeshi Uragami said.

Yang Wonjun found China's improved public services were also important reason for his company to stay.

"Over the past eight years of operation in China, we have seldom experienced power cuts, except during the catastrophic Wenchuan earthquake in 2008," he said.

In contrast, our plants in India have to endure black-outs twice a year, at least, he added.

The company will triple its investment in China in 2011 and spending on equipment purchase will hit $45 million.

"Retreating from the huge Chinese market simply because of higher tax rates? It is not a wise move, indeed," he said.

The Manila-based Metrobank is the largest bank in Philippines. It is also the first foreign-invested bank to put its local incorporation headquarter in east China's Jiangsu Province since China further opened its domestic financial market in 2007.

"We managed to break even after only six months of operation. We will make a profit at the year-end. It is clear evidence that China moves to create level playing fields for foreign companies," said Derek Cheung, President of Metrobank' s China branch.

"Chinese small businesses are thirsty for money, so they are our target customers. We plan to open 15 more local branches in the next three to five years in China", he said.

Due to China's excessive reliance on exports, more than half of all foreign companies in China are processing trade business, which leaves the Chinese side with paper-thin profits and they sometimes contribute to the pollution of the natural environment.

In April, China published a new regulation, which encouraged foreign companies to invest in technology-incentive industries, such as new energy, advanced manufacturing and the service sector.Investment in high energy-consuming industries, and those with excessive capacity, has been restricted.

Foreign companies are also welcomed to set up R&D center in China to bring their expertise and ideas to China, not only money.

Facing the changing conditions, do the foreign companies get ready to adapt?

Takeshi Uragami said next year, Panasonic plan to conduct part of its product design in China, as their customers such as cell phone and computer makers have all moved up business to China.

Our new strategy is expected to bring us to 20 percent increase in business revenue, he said.

"We hope foreign business could enjoy better public services. We also hope the Chinese government could keep the value of yuan stable. It is so important for us," he added.