From today, foreign companies operating in China are subject to two additional taxes – a construction tax and an education tax. Construction tax comes in at 5-7% of the three turnover taxes (i.e. value-added, consumption and operation taxes) and the Education tax is 3% of the three.
Xinhua reckons it means the cost of doing business for foreign businesses in China will rise "by up to 10%". Morgan Stanley, meanwhile, believes the effect on bottom lines will be around 6%.
The imposition of the taxes is the final step in unifying tax regimes across local and foreign companies. The preferential tax treatment that foreign companies used to receive in order to entice them to China has now been totally removed – they will now be treated exactly the same, for tax purposes, as local firms.
"I don’t think this will exert any negative effect on the growth of foreign direct investment (FDI) in China, given China’s robust economic growth and increasing domestic consumption, which will steadily help the market maintain its appeal to foreign businesses," said Wang Zhile, director of the research center on multinationals under the Ministry of Commerce.
However, for anyone looking to rebalance their portfolios, it seems clear that the sectors which are going to be worst hurt are autos, retail, technology and healthcare.
Get ready for some more groaning from the expat community, but the latest tax changes are not as great as the change, in 2008, which unified income tax rates at 25% (upping the income tax rate for foreign companies by 10% points….)