Minimum global tax rate faces China test

Despite being compatible with China’s objectives, the minimum tax rate for large corporations may not receive Beijing’s support

Despite being that rarest of things, an opportunity to satisfy both the U.S. and China, the attempt by the G7 group of nations to set a global tax rate minimum may not receive the support of the Chinese government.

The tax proposals are expected to be high on the agenda at next month’s ministerial meeting of the group of 20, an organization that includes China. The proposals would see nations agree to amend their tax regulations, including a minimum corporate tax rate of 15%. The changes are aimed at stopping big businesses from moving profits to other countries to avoid paying taxes.

At first sight, the changes would seem to favor China, which already has a tax rate above the 15% proposed threshold and is stepping up internal tax enforcement measures.

However, some insiders say that China may use the proposal as a bargaining chip to alleviate trade tariffs that were imposed by the US under Donald Trump’s presidency. But while Beijing could pursue this policy, it is still seen as unlikely. China has always been in favor of international tax initiatives and may be unlikely to block a move that has the support of the G-7 economies.

The case for the minimum tax would be strengthened if it gains support from the G-20 group of countries, in which China has a strong voice. The group also counts Brazil, Russia, and India amongst its membership.

The tax agreement will test China’s commitment to international consensus. Recently, the country has been critical of moves by western nations that it sees as an effort to dictate policy to the Chinese government.

China’s foreign ministry recently dismissed questions about the benefits of the tax proposal. Instead, a spokesman indicated that Beijing welcomes the opportunity to debate the matter within the G-20.

The spokesman, Wang Wenbin, said – “We support the promotion of a consensus on the plan in mid-2021 within a multilateral framework in accordance with the mandate of the G-20.”
According to Henry Gao, an expert in China trade at Singapore Management University, the country is likely to support the G-7 proposal, especially given its record of past support for an increase in global tax governance. He points out that, in 2017, China was one of 70 nations that signed a convention on tax treaties.

China’s banks have also tightened their tax procedures in recent years, with increased know-your-customer rules for depositors and a bilateral agreement with the U.S. tax authorities whereby U.S. citizens report interest earned from deposits held in the country.

One other potential complication is the case of Hong Kong, as the Chinese territory owes much of its competitiveness to its low tax base. Although the territory’s tax rate is above that of the G-7 proposal, it is still considered a major offshore banking center thanks to a multitude of lawyers and accountants that specialize in assisting companies to reduce their tax bills.

Whether these factors are enough for China to throw a spanner in the works remains to be seen.