FOREIGN companies in China have to face a new reality — fewer tax incentives. Despite higher costs, many investors said recently they could not afford to lose a lucrative market like China.

    On Dec. 1, China began to charge foreign companies two taxes, which helps finance city maintenance, construction and schools. Domestic firms already pay the tax.

    This means foreign companies will now have to pay equal taxes with their Chinese counterparts.

    More than 30 years ago, China introduced economic reform and opening-up after decades of economic deadlock. In urgent need of foreign exchange and technology, the government put into place an array of favorable policies to attract foreign investment.

    Among them were hefty and exclusive tax breaks for foreign investors.

    But as China gradually shifted to a market economy, there were stronger calls for equal treatment of foreign and domestic firms.

    China’s legislature passed a law in 2007 to unify the corporate income tax rate for foreign and domestic companies at 25 percent.

    However, much complaining followed the new law. Some argued that the new policy was “unfriendly.” Others said they would learn to adapt to the new environment, as they pinned greater hopes on China after they saw faster business growth in recent years in the world’s fastest-growing economy.

    “We do feel the changing environment in China, because we are faced with higher tax rates, wages and a stronger Renminbi,” said Takeshi Uragami, general manager of Panasonic Electronic Devices (Qingdao) Co. Ltd., one of the first foreign companies to open in China in the early 1980s.

    Before corporate income tax rates were equalized in 2008, foreign firms were charged a 15 percent rate while domestic businesses paid 33 percent.

    “It is not surprising,” said Yang Wonjun, general manager of the Qingdao New Century Tool Co. Ltd., a South Korea-invested cutting tool manufacturer based in the east coastal city of Qingdao.

    “Favorable policies are good, but we never counted on it being perpetual. We have prepared for the changes,” he said. Unified tax rates are a popular practice in many countries and is to be expected in China, he said.

    Although tax rates are no longer appealing, foreign investors said they would not leave China. Further, they would invest more in China because they were confident they would continu to profit even with higher taxes.

    Data released by the Ministry of Commerce showed Foreign Direct Investment (FDI) rose by 8.7 percent year on year in October to US$7.66 billion, the 15th consecutive monthly gain.

    “At any rate, we cannot resist the temptation of China, because it is such a strong economy with relatively cheap labor costs and huge markets, while few other countries have such advantages,” Takeshi Uragami said.

    Yang Wonjun found China’s improved public services were also an important reason for his company to stay.

    “Over the past eight years operating in China, we have seldom experienced power cuts, except during the catastrophic Wenchuan earthquake in 2008,” he said.

    In contrast, our plants in India have to endure black-outs twice a year, at least, he said.

    The company will triple its investment in China in 2011 and spending on equipment purchases will hit US$45 million.

    “Retreating from the huge Chinese market simply because of higher tax rates would not be a wise move, indeed,” he said.

    The Manila-based Metrobank is the largest bank in Philippines. It is also the first foreign-invested bank to open its local headquarter in East China’s Jiangsu Province after China further opened the domestic financial market in 2007.

    “We managed to break even after only six months of operation. We will make a profit by the year-end. It is clear evidence of China’s moves to create a level playing field for foreign companies,” said Derek Cheung, president of Metrobank’ s China branch.

    “Small Chinese businesses are hungry for money, so they are our target customers. We plan to open 15 more local branches in China in the next three to five years,” he said.

    Because of China’s reliance on exports, more than half of all foreign companies in China are processing trade businesses, leaving the Chinese with paper-thin profits. They sometimes contribute to the pollution of the natural environment.

    In April, China published a new regulation, which encouraged foreign companies to invest in technology-incentive industries, such as new energy, advanced manufacturing and the service sector. Investment in high energy-consuming industries, and those with excessive capacity, has been restricted.

    Foreign companies were also welcomed to set up R&D centers in China to bring their expertise and ideas to China.

    Takeshi Uragami said Panasonic planned to undertake some of its product design in China, because cell phone and computer makers had all moved to China.

    His new strategy is expected to bring a 20-percent increase in business revenue, he said.

    “We hope foreign business can enjoy better public services. We also hope the Chinese Government keeps the value of the yuan stable. It is so important for us,” he said.

    (Xinhua)