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China debuts new incentive to keep American firms from heading home
Eli Dile   on Thursday, January 4, 2018 at 12:00:00 am

One of the many stated objectives of the Republican Congress’s tax plan is to encourage companies to repatriate profits. With corporate tax rates slashed from 35 to 21 percent, businesses will have less reason to shelter their earnings offshore, proponents argue. This possibility hasn’t been lost on China, which announced last week it would temporarily exempt foreign companies from paying taxes on all 2017 earnings (New York Times).

Despite its reputation for a low cost of doing business, China’s tax burden is higher than popularly perceived. With a corporate rate of 25 percent, China also collects significant social security contributions and other taxes. Although the move does not explicitly reference the U.S. tax overhaul, most analysts agree it is designed specifically to keep offshored U.S. firms from reshoring. As the New York Times reports:

The newly approved tax incentives in the United States could appeal to companies that are frustrated by China’s rising labor costs, ambitious local competitors and tangled legal systems, or those that would rather spend their money at home or elsewhere. And officials in Beijing have worried that the overhaul could prove to be a challenge to Chinese laws that aim to keep money from leaving the country’s borders.

The offer comes with strings attached, however, as companies must invest those earnings in one of several sectors approved by the Chinese government, such as railways, mining, technology, and agriculture.

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