China announced the new tax policy on December 28 and said it will apply retroactively from January 2018 so businesses can use the exemption on this year’s taxes. A spokesman for the Ministry of Commerce said it “will create a better investment environment for foreign investors and encourage [them] to sustain their investments in China.” Eligibility for the exemption requires that profits be invested in certain industries, one of which is manufacturing.
While the country remains a global manufacturing hub, it has lost some of that share in recent years. European and U.S. manufacturers have complained that rising costs and red tape are making it more difficult to operate in the country. Hard drive manufacturer Seagate closed its factory in Suzhou in early 2017, and Panasonic ceased manufacturing televisions in China recently after 37 years. Manufacturers there also are facing growing competition with domestic companies.
China lowered its tax rate from 33 percent to 25 percent in 2008 but it still has one of the highest corporate tax rates in the world. Companies doing business in China also are required to make social security payments to the government there.
It remains to be seen exactly how manufacturers will respond to the changes, but it does increase the U.S.’ competitiveness on a global scale. While there’s unlikely to be a surge of manufacturers moving from China to the U.S., it could slowly shift the balance in new investments.
Christopher Balding, associate professor of finance at the Peking University HSBC School of Business in Shenzhen, China, told the New York Times that China sets tight controls on how much money can leave the country. Companies must apply for permission to take more than $5 million out of the country, and approval can take months. “Companies know that when they send money to China, it’s basically a one-way gate,” Balding said.
The 2017 Fourth Quarter Manufacturer’s Outlook Survey by the National Association of Manufacturers found that three-fourths of manufactures supported tax reform at home. “If you pass comprehensive tax reform, those dollars can come home, and I think they’ll make more investments,” NAM Chief Economist Chad Moutray told Chief Executive in December.
While manufacturers already have a lower effective tax rate in the U.S. due to generous credits and deductions, a report from the Penn Wharton Budget Model found that the industry will save an additional $261 billion over the next 10 years.
Dennis Muilenburg, CEO of Boeing, said that tax changes will enable the company to invest an additional $300 million in workforce and infrastructure development there. “The reforms enable us to better compete on the world stage and give us a stronger foundation for the investment in innovation, facilities and skills that will support our long-term growth,” Muilenburg said.