Confidence in China as a place to invest has reached new heights, but before the country can fully benefit from substantial additional investments, it needs to make further progress in introducing global standards of governance in legal systems, particularly in contract enforcement and taxation law, a survey of multinational businesses carried out by KPMG International has found.
According to KPMG, business leaders spoke of a “ring of money” surrounding China, held by companies keen to invest in a booming economy, but wary of being caught up in the quirks and uncertainties of the Chinese legal and taxation system.
The survey was carried out among delegates from over 70 multinational companies attending KPMG’s Asia Pacific Tax Summit in Beijing on April 18 and 19, 2007.
Delegates welcomed the planned changes to China’s corporate taxation law. When they are introduced on January 1, 2008, these will raise tax rates for foreign companies to the new national level of 25% and will introduce internationally recognized concepts around transfer pricing and taxation of offshore profits (controlled foreign companies legislation) to protect what is expected to be a growing tax base.
The proposal of unifying the tax treatment of domestic and international enterprises is a signal of intent to give equal treatment to all investors, says KPMG. This is significant because 34% of delegates chose an independent judiciary as the most important institution necessary to establish long term confidence in a country’s economy, ahead of good financial regulators and a modern banking system, and 33% said that legal uncertainty is their single biggest concern over investing in China.
“The Chinese authorities are clearly aware of the need to modernize their business infrastructure,” observed KPMG’s Asia Pacific Region Head of Tax, Lloyd Deverall. “Their new tax law sends all the right signals to the international community that China is becoming a modern economy where they can do business."
“But this law has been more than ten years in the making, and there are other issues over matters like contract enforceability and intellectual property rights. These need urgently to be addressed to send consistent signals to foreign investors in line with the change in the tax law," he added.
Asked where they thought China would be in ten years from now, 57% of the delegates said that it would be further advanced, but would still be developing its full potential.
“This may underestimate the gathering pace of change in the country,” suggested Mr. Deverall, concluding that: “29 percent of our delegates thought that in ten years’ time China would be a world power to rival the US. That is a prospect to focus the mind of any international business looking for serious growth.”
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