Foreign business in China this month are hoping city and provincial governments will announce new incentives to ameliorate an expected exodus of expats in connection with changes in tax rules.
China’s central government decided two years ago to end tax-free status for rent, tuition and other “benefits in kind” for foreign residents at the end of 2021, exposing more of their pre-tax income to the country’s 45% top income tax rate. Chinese nationals don’t get the same tax break, which has helped the country attract foreign capital.
These days, however, China’s has the world’s No. 2 economy, one of the world’s best GDP growth rates, and capital isn’t so scarce. If offsetting measures to the higher taxes aren’t adopted, key international business hubs such as Shanghai that have a large number of overseas executives will face “an exodus of foreigners,” American Chamber of Commerce in Shanghai President Ker Gibbs said in an interview on Monday.
“It will definitely drive a lot of expats out” due to higher individual income tax payments, or lead to the reduced hiring of expats by companies unwilling to bear the extra tax costs of foreign staff, Gibbs said.
The chamber in a March membership survey found that 69.6% of companies believe the tax change will “make it more difficult to attract highly qualified talent to work in Shanghai.” A quarter of businesses expected foreign employees to bear all of the additional taxes on their own. More than a third of respondents said they would consider moving all or part of their Shanghai offices or facilities to another country if the allowances are canceled.
The education allowance is of particular focus for expats, Gibbs said, since foreigners aren’t allowed to attend local public schools. Foreign businesspeople have also been having visa difficulties in connection with the Covid pandemic.
Amcham in March recommended that the government leave the allowances unchanged, delay implementation of new rules, offset the loss of exemptions with a lower overall tax rate, or, at least, give a six-month notice before the rules kick in.
Since that time, China’s government has “listened politely” to calls from foreign business groups for relief, Gibbs said. Individual city or provincial governments can’t exempt national tax rules, but foreign businesses are hoping they can receive offsetting relief, he added. Shanghai, for instance, may create incentives to attract people to certain districts – mostly likely the eastern half of Shanghai known as Pudong, he said.
One of the hardest hit sectors will be international schools “which hire large numbers of expatriates and face a steep increase in taxes,” Amcham said in March. “These schools will not be able to absorb the costs and will subsequently pass them on to parents, many of whom pay school fees on their own.”
Shanghai is home to 730 regional headquarters of multinational companies, according to a report in the state-run China Daily last year. Prominent U.S. investors in the city include Starbucks, GM and Johnson & Johnson.
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