Taxation in the People's Republic of China

By Jinyan Li | Go to book overview

5
Income Taxes on Foreign
Investment

"OPEN TO THE WORLD" POLICY AND FOREIGN INVESTMENT

Historically, foreign trade has been unimportant for China. Until the nineteenth century China had few contacts with the outside world, apart from those with neighboring vassal states, whose products were received by the emperor as tribute. Self-sufficiency was considered a mark of the superiority of China's civilization. The situation began to change in the second half of the nineteenth century, but trade was still perceived as something forced upon China by predatory foreign powers and was associated with exploitation and humiliation at the hands of outsiders.

Following the founding of the People's Republic in 1949, a blockade and trade embargo was imposed on China by the United States and its allies, so that China was largely obliged to turn to the Soviet Union and other countries of the Eastern bloc. 1 A further setback occurred in 1960, with the break between China and the Soviet Union and the withdrawal of Soviet technical assistance. The political turbulence of the 1960s further hindered the establishment of new links.

From 1970 onwards, especially after the visit to China of U.S. President Nixon and the resumption of China's seat in the United Nations, foreign trade started to grow rapidly, but foreign investment in China did not begin to become important until after the initiation of the Four Modernizations program at the end of 1978, 2 and the introduction of the "open to the world" policy. Prior to 1979, there were virtually no foreign owned enterprises operating in China, but by the end of September 1990, about 25,000 foreign-funded businesses had been established with a total capital of approximately U.S.$45 billion. 3

Foreign investors are attracted to China for a variety of reasons. Foremost, no doubt, is the sheer size of the potential market, though there are severe obstacles to penetrating the domestic market and difficulties in repatriating profits earned in the local currency. Investment is also attracted by China's wealth of natural resources, especially mineral resources, and a substantial number of major projects have been established to exploit China's offshore oil potential. A third reason for foreign investment is to take advantage of China's large pool of relatively skilled,

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Taxation in the People's Republic of China
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Preface ix
  • 1 - Evolution of China's Tax System 1
  • Notes 26
  • 2 - Taxation of Goods and Services 31
  • Notes 45
  • 3 - Income Taxes on Individuals 51
  • Notes 63
  • 4 - Income Taxes on Domestic Enterprises 69
  • Notes 87
  • 5 - Income Taxes on Foreign Investment 99
  • Notes 116
  • 6 - Agriculture Tax 125
  • Notes 133
  • 7 - Local Taxes 137
  • Notes 146
  • 8 - Evaluation of the Current Tax System and Prospects for Future Reform 151
  • Notes 173
  • Selected Bibliography 177
  • Index 191
  • About the Author 195
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