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The G-7’s Global Tax Deal Faces a China Test – The Wall Street Journal

An endeavor by Group of Seven nations to set minimum global tax rates for big companies presents a rare opportunity to satisfy objectives of both the U.S. and China. Still, Beijing’s support for the proposal isn’t a foregone conclusion.

The proposals are expected to be on the agenda next month at a ministerial meeting of the Group of 20, a consensus-driven organization which includes China. Under the proposals, nations would agree to adjust their regulations to tax the biggest companies based on where they operate and set new thresholds, including a 15% minimum tax rate.

The deal would appear to have few direct implications for the tax system in China, which already imposes rates above thresholds proposed and has stepped up enforcement of tax rules at home. Changes in global tax policy could have a bigger effect in Hong Kong, a financial center that boasts low tax rates, as well as the gambling enclave Macau—both Chinese territories.

The agreement, promoted by the Biden administration, comes as Beijing has its own list of priorities with Washington, starting with removing trade tariffs that were imposed during Donald Trump’s presidency. But while Beijing could use the opportunity to seek a U.S. concession in return for its support, China has historically backed international tax initiatives and may be unlikely to block a measure that already has the support of other big economies.

The G-7 tax proposal would pack more punch if it were to win broad-based support in the G-20, where China is a strong voice along with Russia, India and Brazil.

The tax agreement will offer a test of Beijing’s commitment to international consensus following months of diplomacy aimed at encouraging U.S. and other nations to craft policy through forums such as the G-20. China has criticized what it sees as a drift toward unilateral policy-making and efforts by Western nations to dictate policy to Beijing.

Yang Jiechi, President Xi Jinping’s top foreign-policy aide, in March told U.S. Secretary of State Antony Blinken that China wouldn’t follow “what is advocated by a small number of countries as the so-called rule-based international order.” While the immediate context to Mr. Yang’s comments appeared to be Western criticism of Chinese human-rights policies, Beijing has repeatedly demanded a seat at the table for major governance decisions.

The Chinese delegation, led by Yang Jiechi, at the opening session of U.S.-China talks in Anchorage, Alaska, in March.

Photo: frederic j. brown/press pool

A spokesman for China’s Foreign Ministry on Monday sidestepped a question on the merits of the tax proposal. But he indicated that China welcomes the opportunity to debate the issues within the G-20, in line with its support for multilateral diplomacy.

“We support the promotion of a consensus on the plan in mid-2021 within a multilateral framework in accordance with the mandate of the G-20,” said the spokesman, Wang Wenbin.

Given its past support for global efforts to tighten tax governance, there is a likelihood it will support the G-7 proposal, says Henry Gao, an expert in Chinese trade and law at Singapore Management University. He recalls that just a few years ago, Beijing criticized Trump administration tax cuts as a self-serving bid to use taxes to pull investment into the U.S.

In 2017, China was among more than 70 nations to sign a convention on tax treaties promoted by the Organization for Economic Cooperation and Development. The nation’s banks have also tightened know-your-customer rules for depositors and in recent years demanded that U.S. citizens report interest earned on their deposits, the result of agreements with U.S. tax authorities.

And like the U.S., China has large internet firms with global ambitions that may face new digital taxes in Europe without the G-7 tax deal.

China itself is hardly the kind of tax haven now in the crosshairs of international regulators—its 25% corporate tax rate and other charges can make it an expensive place to do business. But lower tax rates apply in Hong Kong and Macau, two Chinese territories that make their own tax rules, while numerous Chinese-owned companies are registered in tax havens in the Caribbean and elsewhere.

The corporate tax rate in China can be reduced to 15% for “qualified enterprises which are engaged in industries encouraged by the China government,” including certain technology businesses, according to a summary of the country’s policies by PricewaterhouseCoopers LLP. PwC also notes that some foreign investors in China enjoy tax holidays and other incentives.

In general, tax levies are high in China. In a World Bank assessment of business challenges in individual nations, it estimates that tax and other government fees in China top 59% of profits, compared with 36% in the U.S. Chinese officials in the past have criticized the World Bank’s methodologies.

Beijing’s position on global tax treatment is complicated by Hong Kong, a city that owes its competitiveness as a business center in large part to its low tax base, a lure for Chinese and international companies.

Hong Kong taxes and other charges eat up just 22% of profits of companies, according to the World Bank measure. Hong Kong taxes a company’s initial $255,000 in profit at 8.25% and anything above that level at 16.5%, according to PwC.

While Hong Kong’s primary tax rate is comfortably above the proposed G-7 minimum, Hong Kong is also considered a major international offshore banking center because armies of lawyers, accountants and advisers there specialize in helping companies reduce their tax burden.

London-based Tax Justice Network ranks Hong Kong seventh globally among “jurisdictions most complicit in helping multinational corporations underpay corporate income tax,” ahead of places including Jersey, Singapore and Ireland. China itself is 19th on the list, just after France.

Write to James T. Areddy at james.areddy@wsj.com

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