G20 financial leaders reached an agreement on a “more stable and fairer international tax architecture” with a plan including a global minimum tax rate of 15 percent, sparking concern that the flow of foreign direct investment (FDI) into countries like China may decrease without favorable tax rates.
However, experts said that a global minimum tax rate is unlikely to hinder foreign investment flowing into China, as the country’s huge market size, optimized allocation of production elements and stable expectations play a larger role in attracting foreign capital.
The G20 said in a communique on Saturday that it had endorsed components of a tax overhaul that include the reallocation of profits of multinational enterprises and an effective global minimum tax “after many years of discussions and building on the progress made last year.”
The plan still needs national leaders’ approval at the G20 summit in October. Reuters reported that the global minimum corporate tax would be at least 15 percent to deter multinationals from shopping around for the lowest tax rate.
Cong Yi, a professor at the Tianjin University of Finance and Economics, told the Global Times on Sunday that some developed economies — led by the US — pushed ahead with the global tax overhaul for fear that multinationals would shift industry chains to economies like China, where the effective corporate tax rate for some enterprises in high-tech areas may be lower than 15 percent because of tax allowances and exemptions.
Wei Jianguo, former Chinese vice minister of commerce and executive deputy director of the China Center for International Economic Exchanges, said that it will be hard to stop FDI flows into China with a global minimum tax rate, as the overall size of a market has become the foremost standard for investors.
“Our surveys in provinces like South China’s Guangdong and East China’s Shandong show that foreign investors believe whether a country or a region could optimize production factors to the utmost far outweighs favorable tax rates,” Wei said, noting that South Korean enterprises recently focused on investment in Shandong because they think the allocation of land, capital, technology and talent are the best.
In addition to the country’s huge spending market with 400 million middle-class consumers, its dual-circulation new development model gives a stable outlook for foreign investors, Wei said, noting that FDI into China will maintain double-digit growth.
China’s actual use of FDI surged by 35.4 percent year-on-year in the first five months of the year to 481 billion yuan ($74.2 billion), data from the Ministry of Commerce (MOFCOM) showed. MOFCOM spokesperson Gao Feng said at a press briefing that the rapid growth of foreign investment in China, especially the surge of newly established foreign enterprises, underscores foreign investors’ continued confidence in China’s economic outlook and huge market potential.
Cong said that China needs to further improve the domestic business climate, promote investment convenience and cut costs, rather than rely on favorable tax policies, to attract foreign capital.