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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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