China: Tax Reform and the Financial Crisis

The financial crisis has brought unprecedented challenges to the global economy, and with it a rising demand for regulatory efficiencies.

As a response to current challenges to China’s domestic economy, the Chinese State Administration of Taxation (SAT) issued a notice announcing that the Value Added Tax (VAT) refund rate for export of textiles and garments would be increased from 14% to 15%, to take effect from 1 February.

The obvious result? As estimated by Jingming Bai, Deputy Director of the Chinese Research Institute for Fiscal Science, increasing the VAT refund rate by 1 percentage point would result in US$731 million for Chinese companies.

What’s more, it would save thousands of jobs in the Chinese textiles industry, where the majority of workers are women.

While many countries are coming up with stimulus packages to fight the crisis, tax reforms are an obvious element of fiscal incentives and are indeed expected to be effective at stimulating the economy. In their recent publication, “Tax Incentives as Crisis Response”, Simeon Djankov and Georgi Angelov have outlined three benefits of reforming tax regulations, based on their studies of payroll taxes and social security contributions.

In their view, “First, it is not subject to corruption: the government is not in a position to distribute largesse as under a fiscal expansion program. Second, it works as a direct stimulus – every business and worker in the formal economy gets the benefit. Third, tax reform is quick to implement and can have immediate effects.”

As Doing Business measures the tax burdens and administrative aspects of tax compliance annually, we are looking forward to studying the upcoming tax reforms being implemented to fight this crisis. Most interesting to many is the actual relief that the tax incentives will provide toward alleviating the pain of the financial stress.