Foreign enterprises to face two Chinese landmark laws

  • certain foreign enterprises' costs to go up, due to pay 25 percent of their income to the government coffers as much as Chinese companies.
  • the full impacts of the new regulations remain to be seen.

BEIJING, Two landmark laws that have just gone into effect in China look to drastically alter the business environment, but the reality may turn out to be different, analysts said.

On the face of it, the Labour Law and Income Tax Law, which both began at the start of the year, would seem to entail sharp increases in the cost of doing business in China.

"The people they are trying to protect with the Labour Law, the blue-collar workers at the factories or waitresses at restaurants, are not protected at all," said Andy Xie, an independent economist based in Shanghai.

For one, the Labour Law gives Chinese workers the right to generous severance packages once they have stayed with a company for more than 10 years.

But that is little consolation for the worst-off members of the labour force -- unskilled or semi-skilled workers in fields such as construction and basic services, where contracts rarely last more than two years.

Moreover, some of the worst practices in China's labour markets in recent years do not so much reflect a lack of laws, as they are indicative of flawed implementation.

"Very often, laws are simply ignored by local governments, employers, and even legal enforcement agencies," said Qian Wang, an economist with JPMorgan Chase Bank.

Similarly, the Income Tax Law was passed with much fanfare last year, but the full impacts of the new regulations remain to be seen.

The law is expected to do away with a generation's worth of preferential tax treatment for foreign enterprises, who sometimes have paid as little as 15 percent of their income to Chinese government coffers.

Instead, nearly all of them will now have to pay 25 percent, the same as Chinese enterprises, which previously faced a much steeper 33-percent rate.

Presumably no one likes to see costs go up, but the reaction from foreign businesses has so far been relatively moderate.

Significantly, their focus has been more on the manner in which the rules will be implemented.

"US companies don't object to unification of tax rates on an equal basis with Chinese enterprises, particularly if fairly applied and equally enforced," said Robert Poole, vice president of The US-China Business Council.

Some companies may also be banking on the possibility that the new rules are not exactly set in stone, and that Chinese will adopt favourable rules to make up for the higher tax.

"It cannot be ruled out that some enterprises are lobbying the government. China has consulted plenty of companies to learn about their concerns and made some concessions," said Ryan Chang, a tax expert with accounting firm Deloitte.

One concession, he said, included a cut in the withholding tax rate to 10 percent from 20 percent.

"We will see similar concessions. The law outlines the principles and general rules while many details of enforcement have yet to be announced, which provide much room for changes and flexibility," he said.

"The government is likely to observe the situation and make adjustments."


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