Why China should slash taxes just as the US seeks a global minimum rate for corporations

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June 1, 2021
  • Washington’s push for world economies to sign up to a minimum corporate tax level of 15 per cent offers Beijing a chance to reform its own tax regime by cutting corporate and personal income taxes and streamlining VAT and social security contributions
  • Doing so could help China retain multinationals spooked by the trade war and rising business costs, attract more FDI, and bolster the country’s competitive edge in global supply chains

The move by the 

United States

 to support an international effort for a global minimum corporate tax, which would apply to multinational firms, has injected momentum into discussions on how international businesses are taxed amid speculation that a deal could be reached as early as October.

Curiously, this significant international taxation reform has hardly caused a ripple in 

China

 with news reports and commentaries discussing the issue largely in the global context, giving the impression that it has less bearing on the country, home to many multinationals. 

Beijing’s cautious approach is puzzling, to say the least. As the world’s second biggest economy and the top recipient of foreign direct investment (FDI), China should play a more active role in international discussions of this significant issue.

Moreover, Washington’s push for the global tax plan could offer Beijing a good opportunity to further reform its own tax regime by cutting 

 and personal income taxes and streamlining its value-added tax categories and social security contributions.

This would help Beijing to gain geopolitical and geoeconomic benefits as well as attracting FDI and boosting domestic manufacturing at a time when the Washington-led alliance against China over 

, and trade practices is putting pressure on multinationals to relocate some of their operations out of the country.

Since 2012, the Paris-based Organisation for Economic Cooperation and Development has been leading negotiations on a global tax plan targeting multinationals and digital services firms among its nearly 140 member countries. Even though China is not a member, reports suggest it has been “fully involved”.

 

In April, Washington joined the fray and accelerated the momentum of discussions as US Treasury Secretary Janet Yellen made the case for a global minimum tax on multinational companies, which could help end a “a 30-year race to the bottom on corporate tax rates”. 

 

Following a US proposal that it would impose a global minimum tax of 21 per cent for US companies, there had been speculation it would push for a similar rate worldwide. 

 

The US proposal comes as President 

 needs to generate revenues and finance his US$2 trillion infrastructure spending spree at home by planning to raise the US corporate tax rate to 28 per cent from 21 per cent.

Higher taxes could prompt US companies to shift jobs and profits to tax-haven jurisdictions, hence the idea to impose a global minimum. 

This month, Washington indicated that it would accept a global minimum tax of 15 per cent, a rate much lower than its stated goal of 21 per cent for US companies. This was aimed at speeding up the international negotiations. 

Its new position has gained traction in major European countries including 

 and raised hopes that significant progress would be made in the third meeting of the finance chiefs of the Group of 20 leading economies scheduled for July ahead of the G20 summit of leaders in October

For leading European countries, the discussions of the global minimum corporate tax would help open doors for horse-trading with Washington over their plans to impose bigger digital taxes on large companies, particularly US 

. European officials have long complained that those companies pay little tax on sales to customers in their countries.

Meanwhile, Beijing appears to have taken a wait-and-see attitude with officials refraining from public comments. With an overall 25 per cent corporate tax rate, China seems less impacted, according to analysts. Previous concerns that 

 could be hit hard by Washington’s initial 21 per cent minimum proposal have eased now it has offered to accept a 15 per cent minimum.

Occasional articles have quoted analysts saying that the US’s global tax plan could enable Beijing to extract concessions from Washington for agreeing to the initiative. Some have suggested that Beijing could use the leverage to press Washington to reduce tariffs on Chinese imports. In 2018, 

 against China by imposing tariffs on Chinese goods, which sent bilateral ties into a tailspin.

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