Tue, Apr 10, 2007 page8

• China driving out Taiwanese businesspeople

  • By Paul Lin 林保華
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  The National People's Congress passed two important pieces of legislation in Beijing last month -- the Property Law and the Corporate Income Tax Law. The property law strengthens protection of private property, the greatest beneficiaries being politically powerful and influential people who have taken private ownership of public property. Private citizens, however, are taking the lead in forcing the government to protect their rights.

  One example of this is a Chongqing couple dubbed "the stubborn nail" in the Chinese press who recently stirred up a media frenzy across China with their fight to keep their home from being razed by developers. The corporate income tax law concerns China-based Taiwanese businesspeople who, despite this, have shown little interest in the law. This abnormal reaction is but a reflection of the abnormalities of a Chinese society in which Taiwanese businesspeople had to tolerate whatever the government decides without being able to express their own opinions. If they do, they will only get into trouble.

  To attract foreign investment, both Hong Kong and Singapore offer corporate income tax reductions of 1 percent, a substantial amount for a company. Conversely, Beijing recently raised the corporate income tax rate for foreign investors from 15 percent to 25 percent. Only companies making extortionate profits can stand such a massive increase, particularly at a time when operating costs have increased.

  I wonder why foreign investors and Taiwanese businesspeople still remain quiet? Is it because they have come up with a solution to the problem? If they don't withdraw their investments, they must come up with a better strategy, but if they really are planning to withdraw investments, they must do so quietly to avoid last-minute blackmail.

  In the past, the corporate income tax rate for Chinese-owned enterprises was 35 percent, while for foreign investors, it was 15 percent. This was certainly unfair, but at that time, China needed foreign capital and felt forced to do so.

  The Chinese enterprises experiencing this unfair treatment were mostly the ones not very well-connected. Well-connected enterprises already had overseas investments which they brought back into China as so-called "fake" foreign capital.

  The task of using foreign investment to kickstart China's economic development has been completed. China's foreign exchange reserves have already reached the US$1 trillion mark and the pressure to appreciate the yuan remains high. Beijing thus seems to believe it can now drive out foreign investment.

  Why else, given China's economic situation and financial income, would Beijing raise the corporate income tax to the extent that it makes things difficult for foreign investors, helping eliminate small- and medium-sized Taiwanese and Hong Kong companies.

  Beijing also fears an exodus of foreign capital from China, which explains the corporate income tax law mentioning differential treatment. This could be why Finance Minister Jin Renqing (金人慶) said that the new income tax law would not have a major impact on Taiwanese companies.

  What Jin was driving at was that Articles 25 to 28 of the law stipulate that high-tech companies and small companies with small profits can still receive preferential treatment and a five-year buffer period.

  The problem is that this legislation is rigid while people are flexible. The definitions of "high-tech companies" and "small companies with small profits" are left to government officials at different levels. Clearly, the law will only give corrupt Chinese officials another chance to extort money from Taiwanese companies, thus increasing operating costs. Can they survive without cooking their books?

  If Taiwan's high-tech sector loses its advantage by enhancing China's sector, Taiwanese companies could be hit by the 35-percent corporate income tax.

  This is why Taiwanese businesspeople must look beyond short term preferential treatment.

  Not long ago, the World Taiwanese Chamber of Commerce met in Dallas, Texas. During the meeting, China-based Taiwanese businesspeople complained that when they first started investing in China, everything was rosy and they felt like they were in heaven, hearing slogans such as "Taiwanese businesspeople first" and "Taiwanese businesspeople take the lead."

  But there always comes a day when the balloon bursts and you're dragged down into a bottomless pit.

  Come back to Taiwan, there's a place for you here.

  Paul Lin is a political commentator based in Taipei.

  Translated by Daniel Cheng and Perry Svensson
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