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Economy

U.S. tax cut may bring mixed effect

1
2018-01-16 08:41China Daily Editor: Mo Hong'e ECNS App Download

Decrease could stimulate Chinese firms' appetite for overseas investment

The United States corporate tax reduction could provide an opportunity for Chinese companies to increase their market share and even become top leaders of their sectors in China, considering that their U.S. competitors may adjust business strategies in China, EY experts said on Monday.

The Tax Cuts and Jobs Act, which has been signed into law by U.S. President Donald Trump, will allow U.S. companies to bring offshore profits home at greatly reduced tax rates.

Previously, these companies could legally defer paying taxes on profits earned in other parts of the world at a rate of 35 percent, as long as those profits stay overseas. But now, they only need to pay a onetime transition tax on previously deferred repatriation of foreign earnings at discounted rates of 15.5 percent for liquid assets and 8 percent for illiquid assets.

"The new tax law will incentivize multinational U.S. companies to repatriate their offshore profits, including profits in China, back to their home country. This may lead to a shrink of their market share in China while offering opportunities of a rise in market position for their Chinese counterparts," said He Lipeng, transaction tax partner of EY, one of the largest international accounting firms in the world.

Many Chinese companies operate businesses in the U.S. that are not very large; thus, they care more about the impact of U.S. tax cuts on their U.S. competitors' business in China than they do about the impact on market competition in the US, He said.

Moreover, U.S. companies will enjoy a 40 percent tax cut, with the corporate tax rate dropping from 35 percent to 21 percent. This will also increase Chinese companies' appetite for making investments in the US, he added.

As many changes are taking place in tax policies in big countries including the US, Lucy Wang, EY's international tax services partner, reminded Chinese companies that are expanding their business globally to be better prepared for tax disputes.

"We expect to see an increase in tax disputes. Taxation authorities and corporate tax payers may have different interpretations of tax laws. Law enforcement may also vary from one country to another," Wang said.

"We advise Chinese companies to prepare for a tactical system to handle tax disputes. For example, they should set the route for reporting if a tax dispute happens, decide where the disputes should be handled at which corporate level, and look into approaches to resolve disputes," she said.

  

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