China's new tax policy lowers earnings

China-based Taiwanese enterprises' capital increase by retained earnings has seen a significant rise since the second half of last year because of the Unified Taxation System that went into effect on Jan. 1 in China, a specialist of the Ministry of Economic Affairs' (MOEA) Investment Commission (投審會) said yesterday.

China's New Enterprise Income Tax Law, passed by the Chinese government last March, increased the 15 percent preferential tax rate to 25 percent on both foreign and Taiwanese-invested enterprises when it went into effect this year.

"Because the new income tax law took away the foreign investor benefit of being waved from income tax on distributed earnings, the number of Taiwanese enterprises using undistributed earnings to increase their capital has seen a significant rise since the second half of last year," Su Chyi-yann (蘇琪彥), specialist of the MOEA's Investment Commission, said yesterday.

Taiwanese enterprises' other option was to distribute their accumulated undistributed earnings to foreign investors before the end of last year to avoid a 10 percent income tax, Su added.

"The new labor law ... will have very little impact on the return of China-based Taiwanese enterprises," Liu Meng-chun (劉孟俊), deputy director at the Chung-Hua Institution for Economic Research's (CIER, 中經院) first research division, said by phone yesterday.

"China-based Taiwanese enterprises that moved their manufacturing facilities to China due to the lower wages that it provided in the past are not very likely to return to the nation as the domestic wages are still relatively high," Liu said, adding that Southeastern Asian countries would be a better option.

"However, the operating environment and language barriers that Taiwanese enterprises might encounter in South Eastern Asian Countries, will have a larger impact on small and medium enterprises than large enterprises," Liu added.