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94 IRET Policy Bulletin 1 (2010)

handle is hein.taxfoundation/iretpbul0053 and id is 1 raw text is: December 23, 2010 ___ ___ ___ ___ No. 94 THE TAX SYSTEM OF CHINA Introduction and Summary The People's Republic of China (PRC) has transformed its tax system in recent years. It has adopted many types of taxes common in major nations with large private sectors that engage actively in world trade. China seeks an appropriate balance between revenue raising, fairness, and growth- permitting types and levels of taxes. Growth is an important goal, because raising living standards can benefit everyone. The central government relies chiefly on a value added tax for its revenue. The VAT is one of several types of consumption-based tax in which investment in plant and equipment is expensed immediately, not depreciated over time. Consumption-based taxes are less damaging to saving and investment than traditional income taxes. The corporate income tax rate is 25 percent, close to the average for developed nations and well below the rates in the United States and Japan. The provinces are allowed individual and business income taxes, but their structure is determined by the central government, and contain several provisions that are friendly to saving and investment. To avoid multiple layers of taxation on saving and returns on saving: Capital gains on stock trades are tax exempt. Half of dividends from companies listed on Chinese stock exchanges are tax exempt. Bank deposit and government bond interest are tax exempt. Foreign investors are free from tax on capital gains and dividends. At present, there is no estate or transfer tax. Social insurance contributions are tax deductible and social insurance benefits are tax free. Rural workers own their social insurance accounts, as in many countries that have private accounts for social insurance rather than centralized tax/transfer programs. In short, China has a tax system that relies relatively heavily on consumption taxes, and its individual income tax is structured to avoid or reduce the excess layers of tax on saving and investment usually found in income tax systems. Institute for IRET is a non-profit, tax exempt 501(c)3 economic policy research and educational Research organization devoted to informing the public about policies that will promote on the economic growth and efficient operation of the market economy. Economics of 1710 Rhode Island Avenue, N.W., 11th Floor e Washington, D.C. 20036 Taxation (202) 463-1400 * Fax (202) 463-6199 9 Internet www.iret.org

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