Are you watching, Washington? Beijing has halved withholding taxes to as low as 5 per cent for companies with whose governments it has applicable treaties. This move continues a long-running and welcome trend around the world of cutting withholding tax to help attract inward investment. Time for the US to get on board.
Before reductions for investors who benefit from existing tax treaties, the US currently withholds 30 per cent. Even before its cut, China took just 10 per cent. The US position has been built on being the world’s investment destination of choice for decades and therefore charging for the privilege. Really, Washington, that is just so 20th century. Just look at the numbers. The US share of world foreign direct investment fell a fifth in the decade to 2010, according to World Bank data. At 15 per cent, that leaves the country narrowly ahead of China, whose share has more than doubled. Put in nominal terms, the decline is even starker: as world FDI rose $50bn over that decade, US inflows fell $85bn. China, meanwhile gained $147bn.
Corporate tax reform is moving up the US agenda as the presidential campaign heats up. That is a start, but only deserves half a nod compared with China’s nimble pragmatism. It is no coincidence China’s friendlier rate came as FDI was shown to have dropped 3 per cent in the first six months of this year. Withholding tax is not going to headline the US reform debate given it has a corporate rate – 39 per cent, including state levies – that only Japan comes anywhere near. Chinese companies face a headline rate of 25 per cent. At least a serious US tax debate is being had, finally. Now it is time for US companies themselves to wade in. They will not benefit from China’s move (UK, Hong Kong and Singapore-based groups are among those that will) but perhaps the fear of losing inward investment to friendlier jurisdictions might spur them to add withholding tax to the broader US debate.
