An Update on Taxation in China Note An Update on Taxation in China I. INTRODUCTION On April 12, 1986, the central government of the People's Republic of China issued a new five year plan reaffirming the coun- try's commitment to economic decentralization. The PRC announced a plan to broaden the role of free market forces and to curtail the interdependence of commercial enterprise and the state.1 This plan demonstrates China's current quest to make more varied and efficient use of capital investment. U.S. investors may wish to consider the effects of the new plan on doing business in China. This note examines specific features of China's tax system to aid the U.S. investor in planning under the pres- ent tax system and in predicting future developments. To the extent that a tax system reflects national economic policy, it is necessary to evaluate the Chinese tax system not only on its own terms but also in light of China's experimentation with profit-motivated business and investment. This discussion takes up three aspects of tax planning in China: first, an overview of the present tax scheme; second, the influence of that tax scheme on whether and how to do business in China; and third, the interaction between Chinese tax incentives and U.S. tax law. A summary of PRC income taxes is provided in the chart following the text. II. AN OVERVIEW OF TAXES ON FOREIGN INVESTMENT This section describes and contrasts the principal tax provisions applicable to foreign investors in an effort to provide an understand- ing of current Chinese tax policy and assist the taxpayer in making business choices. This section first covers the taxation of Chinese domestic enterprises. It then explains the Individual Income Tax 1. Sterba, Central Control Subdued Under Peking's Plan, wall St. J., April 15, 1986, at JOURNAL OF CHINESE LAW Law (the individual income tax),2 which applies to Chinese and for- eigners. Finally, it addresses the Income Tax Law Concerning Joint Ventures with Chinese and Foreign Investment (the joint venture income tax),3 and the Foreign Enterprise Income Tax Law (the for- eign enterprise income tax).4 Tax aspects of a foreign investor's busi- ness choices are described in section III. Rather than include foreign ventures in the regime designed for taxation of domestic enterprises, China has for the most part promul- gated a separate system for such ventures. One explanation for this may be that operations with foreign participation do not directly share revenues with the state, as do state-owned enterprises. As China's economy becomes more decentralized, however, the rationale for maintaining two separate systems of taxation fades. It has recently been proposed, for example, that even such industries as "internal airlines, post and telecommunications departments" should be allowed to retain 90% of their profits.' As pricing restrictions ease, those profits will presumably reflect real earnings, and will be subject to tax. If such proposals become law, China's economic sys- tem would allow for a uniform scheme of taxation. At the same time, 2. Individual Income Tax Law of the People's Republic of China [hereinafter IIT Law] (Zhonghua Renmin Gongheguo Geren Suode Shui Fa) (Sept. 10, 1980) (trans. in TAXES AND INVESTMENT IN ASIA AND THE PACIFIC, Vol. 1, app. 4(e) [hereinafter TIAP] (published by International Bureau of Fiscal Documentation 1984 and Supp. 1985)). 3. Income Tax Law Concerning Joint Ventures with Chinese and Foreign Investment [hereinafter JVT Law] (Zhonghua Renmin Gongheguo Zhong Wai Jingying Hezi Qiye Shui Fa) (Sept. 10, 1980) (trans. TIAP, supra note 2, app. 4(c)). 4. Foreign Enterprise Income Tax Law [hereinafter FEIT Law] (Zhonghua Renmin Gongheguo Waiguo Qiye Fa)(Dec. 18, 1981) (trans. TIAP, supra note 2, app. 4(a)). Among other important taxes is the industrial and commercial consolidated tax, a turnover tax on goods and services along the chain of production. Reference to the turnover tax will only be made as need arises in the context of the other laws. See Gelatt, Tax Aspects of Business with the PRC, 22 COLUM. J. TRANSNAT'L L. 421, 441-42 (1984); TIAP, supra note 2, at 162. Other recent writings on tax law in China include: Bell, People's Republic of China - Personal Income Tax, 11 GA. J. INT'L & COMp. L. 373 (1981); Castleman, Taxation in the People's Republic of China: The System and its Function, 46 ALB. L. REV. 776 (1982); China Laws for Foreign Business - Taxation (CCH Australia) (1985); Fields, Taxation: The People's Republic of China Income Tax Laws, 22 HARV. INT'L L. J. 234 (1981); Hammer, Jack and Ho, The Important New U.S.-China Treaty: Its Impact on U.S. Firms, 37 TAX EXEC. 53 (1984); Han, People's Republic of China's Foreign Enterprise Income Tax Law and Regulations, 6 HAS- TINGS INT'L & COMP. L. REv. 689 (1983); Huang, The Income Tax Laws of the People's Republic of China, 25 B. B. J. 13 (1981); Jack, Hammer, and Conn, Taxation of Foreign Enter- prises in China, 30 CAN. TAX J. 416 (1982); Note, Taxation of Joint Ventures in the People's Republic of China: A Legal Analysis in the Context of Current Chinese Economic and Political Conditions, 15 VAND. J. TRANSNAT'L. L. 513 (1982); Pomp, Gelatt and Surrey, The Evolving Tax System of the People's Republic of China, 16 TEX. INT'L L. J. 11 (1981); and Reynolds, Doing Business with the People's Republic of China: Tax Considerations, 14 INT'L LAW. 49 (1980). 5. Sterba, supra note 1. [1:93 UPDATE ON TAXATION there may be other policy reasons which would prolong the existence of separate tax systems.6 A. Taxation of Domestic Enterprises Since 1950, China has applied an "industrial and commercial income tax" to all non-state-owned entities such as collective and pri- vate enterprises. 7 The tax is assessed yearly, but enterprises must esti- mate and pay quarterly installments. The base figure for taxable income is the change in net worth for the accounting period, with allowances for exemptions, deductions, and depreciation.8 This method is in principle the same as that used in the U.S. Income is taxed at rates ranging from 5.75% on less than 300 yuan per year, to 34.5% on income of 10,000 yuan or more.9 Also, for specific enterprises a local surcharge ranging from 10% to 100% of annual taxable income may be levied, based on the amount of industrial and commercial income tax."° There is no preferential rate of taxation for capital gains, which simply appear as part of the change in net worth.1 Since October of 1984, state-owned enterprises have been subject to an income tax.12 Large and medium-sized state-owned enterprises are taxed at a uniform rate of 55%; small enterprises are taxed on the basis of an eight-grade progressive income tax rate.13 Reportedly, collective enterprises are now taxed at the progres- sive rates applied to small state-owned enterprises.14 This step toward unification of the tax system may reflect the Chinese commitment to putting both state-owned and private enterprises on a profit-making, pay-their-own-way basis. Certainly, the very existence of a domestic enterprise tax system for both kinds of enterprises suggests that state- owned enterprises will not always enjoy financial support from the government; increasingly they will need to consider tax aspects of business as do private enterprises. Furthermore, as both state-owned 6. These reasons, relating to incentives and controls, will be examined in section IV of this article. 7. TIAP, supra note 2, at 105. Since collective enterprises will now be taxed in the same manner as small state-owned enterprises, it is unclear what function an industrial and commer- cial tax serves in China. See infra note 14 and accompanying text. 8. Id. at 105-06. 9. Id. at 161. 10. Id. at 161. 11. Id. at 106. 12. Id. at 107. An experimental profit tax on a number of selected state-owned enter- prises has existed since 1979. This experiment extended to all profit-making state-owned enterprises in 1983. 13. Id. There are also applicable excise and windfall taxes. 14. Id. at 105. 19871 JOURNAL OF CHINESE LAW and private enterprises come to operate on a profit-loss basis, presum- ably the need for separate foreign and domestic tax structures will diminish.15 The domestic enterprise income tax is apparently both short and simple. Together with the taxes on foreign business, it forms a "gen- erally conventional tax system."' 6 However, this apparent simplicity should not deter the business planner from further investigation, espe- cially with regard to the tax provisions applicable to foreign business. Major features of the tax system are of recent origin, and the income taxes are only beginning to be a vital source of revenue in China. Nevertheless, the future may lie the way of the consolidated turnover tax:17 this turnover tax targets 107 items, each subject to a different rate and to surcharges and exemptions. 8 The potential exists for com- parable (or greater) complexity in the income tax statutes, especially as Chinese capital structures become more sophisticated. The Chinese have a tendency to make up for nominal simplicity through informal understandings and agreements. Thus, the business planning inquiry cannot end with these relatively straightforward statutes and regulations. Section III will describe some of the relevant complexities of the tax system in practice. B. The Individual Income Tax To foreign investors familiar with the so-called "iron rice bowl" system in China, an individual income tax seems quite anomalous. However, under new regulations, Chinese citizens are subject to a 20% to 60% tax on income in excess of an amount determined by salary status.1 9 The new regulations do not apply to foreign taxpayers.2 15. See supra, text following note 4. Also, the China-U.S. Tax Treaty requires that citi- zens and enterprises of both nations not be subject to taxation any more "burdensome" than that imposed on domestic individuals or enterprises. Agreement Between the Government of the United States of America and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income, Apr. 30, 1984, United States-People's Republic of China, art. 23, 1 CCH Tax Treaties f 1403 [hereinafter Treaty] (ratification approved by U.S. Senate July 24, 1986). This require- ment has already been satisfied at least by the individual tax, applied to both foreigners and Chinese citizens. See infra, text accompanying notes 19-40. However, since the Treaty recog- nizes the validity of the current enterprise taxes, see article 2, apparently separate tax struc- tures may be maintained without necessarily being in violation of article 23. 16. Gelatt, supra note 4, at 503. 17. Id. at 442. 18. TIAP, supra note 2, at 162-64. 19. Renmin Ribao (People's Daily), Zhonghua Renmin Gongheguo Geren Shouru Tiaojie Shui Zhanxing Tiaoli (Provisional Regulations of the PRC on Individual Income Adjustment Tax), Dec. 12, 1986, at 4, col. 5. 20. Id. art. 2. UPDATE ON TAXATION The tax has two main rate systems applicable to foreigners. The first applies to "wages and salaries," and has a progressive structure: the first 800 yuan per month is exempt, and marginal rates from 5% to 45% apply thereafter (the top rate applying to monthly income over 12,000 yuan).2 1 The second applies to "compensation for per- sonal services [such as income from a legal practice2 2], royalties, inter- est, dividends, bonuses and lease of property," and other kinds of income.23 Income of this kind is taxed at a flat 20% rate.24 For income from compensation for services, royalties, or property leasing, a deduction of 800 yuan is allowed for expenses if the amount in a single payment is less than 4000 yuan; for single payments greater than 4000 yuan, a deduction of 20% is permitted." Foreign-source income, when taxed at all, is computed and taxed separately on a yearly basis.26 One simple aspect of the statute is that, apart from the basic deduction in the progressive and flat taxes, no other deduction as such is allowed. However, properly verified "advances or reimbursements by foreign companies to their employees for specific company expenses" are apparently exempted from employees' incomes.27 An open question is whether the statute's simplicity will give way to increasing complexity as foreigners conduct more long-term business in China, and earn greater (and more varied) income there. Exemptions are also granted on the basis of the taxpayer's resi- dence status. For example, as mentioned above, only persons residing in China more than five years are taxable on worldwide income.28 Those who reside in China from one to five years are taxable only on income from China and foreign income remitted to China.29 Persons residing in China less than one year are taxed only on "income gained within China.""0 These distinctions depend on the source generating the income, not the place of payment.3 ' However, foreigners who reside in China less than ninety days have an exemption for wages and 21. See supra note 19, at 4. 22. Detailed Rules and Regulations for the Implementation of the Individual Income Tax Law [hereinafter IIT Reg.] (Zhonghua Renmin Gongheguo Geren Suode Shui Fa Shishi Xize) (Dec. 14, 1980), art. 4.2 (trans. TIAP, supra note 2, app. 4(f)). 23. IIT Law, supra note 2, art. 2(2)-2(4), 2(6). 24. Id. art. 3(2). 25. Id. art. 5(2); IIT Reg., supra note 22, art. 11. 26. IIT Law, supra note 2, art. 7; IIT Reg., supra note 22, art. 16. 27. Gelatt, supra note 4, at 433. 28. IIT Reg., supra note 22, art. 3. 29. Id. 30. IIT Law, supra note 2, art. 1. 31. IIT Reg., supra note 22, art. 5. 1987] JOURNAL OF CHINESE LAW compensation paid to them outside of China.32 Non-residents are taxed in full on personal service compensation, royalties and property leasing income earned in China.33 Other exemptions, not based on source, include the receipt of dividends from equity joint ventures and urban and rural cooperatives.34 The Ministry of Finance has changed the value of the exemptions based on residence status. This is an example of why caution must be used in relying on statutory language. Apparently the Ministry will allow a foreign resident in China to exempt foreign-source income whether or not remitted to China, "provided the foreigner's presence is attributable to his employment by a joint venture, cooperative ven- ture, or foreign enterprise in China, and does not result from an intent to take up long-term residency in China. ' 35 This exemption may mean only that tax authorities are thus far not adequately prepared to monitor foreign income. It may also be an effort to encourage foreign workers to bring in much-needed foreign currency. It should be apparent that China's individual income tax laws primarily address earned income. There is no specific capital gains tax or tax applicable to the sale or exchange of property, 6 but the Ministry of Finance has reserved the right to tax "other kinds of income."37 While China has begun to encourage the sale of securities and other exchanges incidental to stock redemption and corporate liq- uidation and reorganization, no provision covers taxation of these transactions. The importance to U.S. investors of tax laws in these areas depends not only on the development of Chinese capital mar- kets, however, but also on the legal capacity of foreigners to own property in China.38 As it stands, the individual income tax is relatively straightfor- 32. Id. art. 5(1). By Treaty, however, "professional services" income is not taxed in China if the taxpayer resides in China less than 183 days and has no permanent establishment. Treaty, supra note 15, art. 13. A similar provision applies to salaries. Id. art. 14. 33. Treaty, supra note 15, art. 11. 34. Id. art. 5(2). 35. Gelatt, supra note 4, at 430. See also TIAP, supra note 2, at 111. 36. See Gelatt, supra note 4, at 433. By comparison, under the U.S. Tax Reform Act of 1986, preferential capital gains rates will be eliminated in the U.S., at least until the next round of reform. The Chinese, however, may find preferential rates a useful addition to their broad scheme of channeling investment through such devices as Special Economic Zones. The immediacy of the problem of the tax treatment of securities income is demonstrated by the recent announcement of the creation in China of "bond-trading centers" to establish a market for domestic enterprise bond issues. Fung, China Prepares to Start Center to Trade Bonds, Asian Wall St. J., Aug. 4, 1986, at 1, col. 6. 37. IT Law, supra note 2, art. 2(6). 38. The Constitution of the PRC prohibits private ownership of land: "No organization or individual may appropriate, buy, sell or lease land, or unlawfully transfer land in other ways." THE CONSTITUTION OF THE PEOPLE'S REPUBLIC OF CHINA, art. 10. The Constitution UPDATE ON TAXATION ward. Once the foreign worker determines his status as a resident and the allocation of his income under the progressive or flat rate struc- ture, the rest seems mechanical: it is just a matter of complying with various withholding and filing requirements. There are (so far) no opportunities for sheltering income in losing or capital gain ventures, or for deferring gain recognition. The nearest Chinese equivalent seems to be the exemption provided for interest income on accounts with Chinese state banks and credit cooperatives of the PRC.39 Future individual and other tax treatment of capital gains and securi- ties-related transactions should prove a complex addition to the Chi- nese tax system.40 C. The Joint Venture Income Tax The joint venture income tax is a combination of tax accounting provisions and tax incentives. Since equity joint ventures are incorpo- rated in China,4 the venture joint tax law is even simpler than that for individuals, at least to the extent the individual tax varies with residence status. Whether this tax is also effective at raising revenue for the state is a question which remains to be answered through empirical research. A joint venture is taxable on all income, whether domestic or foreign. 42 There is a flat tax on income of 30%, plus a "local surtax" of 10% on the 30% tax. 3 Thus, the effective rate is 33%. If the foreign member of the joint venture wishes to remit its profits abroad, a further 10% withholding tax is levied on that amount.44 Alterna- tively, either member of the venture may re-invest profits within China for at least five years, and thereby obtain a 40% refund of taxes paid on the profits re-invested.45 The income tax is assessed annually, but must be paid quarterly.46 Other provisions of the joint venture tax law may relieve some of provides also that citizens may own "lawful property," id. art. 13, but does not address the question of foreign ownership of property. 39. lIT Law, supra note 2, art. 4(2). 40. "As tax officials gain more experience and confidence, they are likely to develop tech- niques and approaches that deviate from the mainstream and fulfill the expectations of many third world leaders that China will emerge as an intellectual leader in tax issues." Gelatt, supra note 4, at 504. 41. Joint Venture Law of the PRC [hereinafter Joint Venture Law] (Zhonghua Renmin Gongheguo Zhong Wai Hezi Jingying Qiye Fa) (July 8, 1979) (trans. TIAP, supra note 2, app. 1(a)), art. 1. 42. JVT Law, supra note 3, art. 1. 43. Id. art. 3. 44. Id. art. 4. 45. Id. art. 6. 46. Id. art. 8. 1987] JOURNAL OF CHINESE LAW the fears of foreign investors that joint ventures will be slow to show a profit. For instance, one basic provision allows losses to be carried forward for up to five years.47 A related provision adds another incentive to that of the carry-forwards. A joint venture chartered to operate for ten years or more may "be exempted from income tax in the first profit-making year and allowed a 50% reduction in the sec- ond and third years."4 Certain joint ventures may be eligible for more extended reductions.4 9 In other words, a joint venture pays no income tax on continuous net losses. When it turns a profit, it has one to five years to offset losses against positive income, and, when the offset is depleted, it has a tax exemption on the next year's profit, followed by the reduced rates for two years. The Chinese apparently have devised this system on the assumption that a joint venture will become progressively more profitable following "losses in the initial stage of operation. ' 50 It is not clear what happens if a joint venture is only erratically profitable; presumably the enterprise may repeatedly take advantage of loss carry-forwards, but the tax exemption and reductions seem to apply only once.51 Taxable income is defined as "net income in a tax year after deduction of costs, expenses and losses."5 2 Deductions are allowed for such expenses as wages, inventory turnover, and apparently, the consolidated industrial and commercial tax. 3 In contrast to U.S. tax law, "interest on capital" is not deductible.5 4 The reason for this is to prevent the venture from paying out disguised dividends;55 the restric- tion does not apply to interest on loans made in the ordinary course of business.5 6 Since interest paid by a joint venture to an individual is 47. Id. art. 7. 48. The exemption occurs "upon approval by the tax authorities of an application filed by the enterprise." Id. art. 5. 49. Id. This article cites as examples ventures in "such low-profit operations as farming or forestry or located in remote, economically underdeveloped outlying areas ...." 50. Detailed Rules and Regulations for the Implementation of the Income Tax Law Concerning Joint Ventures with Chinese and Foreign Investment [hereinafter JVT Reg.] (Zhonghua Renmin Gongheguo Zhong Wai Hezi Jingying Qiye Suode Shui Fa Shishi Xize) (Dec. 14, 1980), art. 5 (trans. TIAP, supra note 2, app. 4(d)). 51. See JVT Law, supra note 3, art. 5. The exemption and subsequent reductions begin to take effect in the "first profit-making year," which is defined as the first year of profit net of any loss carry-forwards. JVT Reg., supra note 50, art. 15. This tax holiday thus appears to be a once-only benefit. 52. JVT Law, supra note 3, art. 2. 53. JVT Reg., supra note 50, art. 8. 54. Id. art. 9(3). Presumably a joint venture capitalized with debt and not equity would not be able to deduct the interest on the debt. 55. See Gelatt, supra note 4, at 452. 56. Id. at 452. UPDATE ON TAXATION taxable to the individual while a dividend is not,57 the limit on interest deductibility also acts as a penalty. The interest payment is made out of after-tax income at the "corporate level," and it is taxed again in the hands of the lender. Dividends are not deductible either, but they are not taxed again in the hands of the recipient. A final problem area relating to deductibility concerns payments into "reserve funds, the bonus and welfare funds for the workers and staff members and the expansion funds of the venture."58 These funds apparently act as a kind of self-insurance for a joint venture, provid- ing a pool of capital to protect both the enterprise and the employees against future cash shortages. 9 Profit available for distribution to the shareholders is only the amount net of taxes and payments into these funds. The payments are not "currently deductible," and it is also unclear whether payments made out of the fund are deductible, despite the deductibility of similar payments made out of "general joint venture funds."6 As in the U.S., the cost of fixed assets must be depreciated, not deducted.6' The method is limited "generally" to straight-line depre- 62fociation, probably for administrative convenience. Also, consistent with the rest of the Chinese tax system, capital gains are included in ordinary income.63 So far, the Chinese have not adopted depreciation and capital gains as investment incentives, as was until recently done in the U.S. 64 Since the Chinese do appear eager to offer other types of tax incentives such as tax holidays, perhaps they will consider adop- tion of depreciation and capital gains preferences as well. The use of other tax incentives, in conjunction with both joint ventures and for- eign enterprises, will be examined more closely in section III. D. The Foreign Enterprise Income Tax The foreign enterprise income tax law applies generally to all for- eign ventures, other than joint equity ventures, doing business in China.65 Echoing the structure of the individual tax, the foreign enterprise tax makes a fundamental distinction based on whether a 57. IIT Reg., supra note 22, art. 5(2). 58. Joint Venture Law, supra note 41, art. 7. 59. This is not to suggest that the funds are adequate for major casualty losses. They seem more analogous to bad debt reserves held by banks. 60. Gelatt, supra note 4, at 454. 61. JVT Reg., supra note 50, art. 9(l). 62. Id. art. 12, f 2. 63. Id. art. 15. 64. In the U.S. the availability of such incentives has been reduced by the Tax Reform Act of 1986. 65. FEIT Law, supra note 4, art. 1. 1987] JOURNAL OF CHINESE LAW foreign enterprise has an "establishment" in China. While the foreign enterprise tax parallels the joint venture tax in basic features such as calculation of net income, depreciation and deductions, it does raise other issues, such as the meaning of "establishment," which may con- cern U.S. investors. 1. Companies with Establishments Foreign enterprises "which have establishments in the People's Republic of China engaged in independent business operation or co- operative production or joint business operation with Chinese enter- prises" 66 are, like foreign residents, subject to a progressive income tax. The rates range from 20% on annual income under 250,000 yuan to 40% on annual income exceeding 1,000,000 yuan.67 Unlike joint ventures, foreign enterprises with establishments are also subject to a local 10% tax on income, although the local tax may be reduced or eliminated in some cases.68 (The local tax is calculated as 10% of income before application of the national tax.69) Certain foreign enterprises engaging in "low profit occupations," such as farming, for- estry and animal husbandry, may also apply for limited national tax reductions and exemptions.7 0 One unusual feature of the foreign enterprise tax law is the treat- ment of those enterprises which cannot document their taxable income. In such cases, the tax authorities will impute profit based on that of "other enterprises of the same or similar trade, '7 1 and tax it according to the regular schedule. Presumably this provision helps prevent tax evasion, and encourages accurate financial accounting. The law does not state whether foreign companies with establish- ments will be taxable on their worldwide income or just on Chinese- source income. 72 This may represent a desire to preserve flexibility in the tax law so it can accommodate a wide variety of foreign corporate structures. The immediate advantage of the flexibility to the Chinese 66. Id. art. 1. 67. Id. art. 3. This compares with a new U.S. top corporate tax rate of 34%, to take effect after 1987. I.R.C. § 601 (1986); N.Y. Times, Sept. 28, 1986, at A34, col. 3. 68. Id. art. 4. Article 4 provides, in part: "Where a foreign enterprise needs reduction in or exemption from local income tax on account of the small scale of its production or business, or its rate of profit, this shall be decided by the people's government of the province, munici- pality or autonomous region in which the enterprise is located." 69. Detailed Rules and Regulations for the Implementation of the Foreign Enterprise Income Tax Law [hereinafter FEIT Reg.] (Zhonghua Renmin Gongheguo Waiguo Qiye Suode Shui Fa Shishi Xize) (Feb. 7, 1982), art. 5 (trans. TIAP, supra note 2, app. 4(b)). 70. FEIT Law, supra note 4, art. 5. 71. FEIT Reg., supra note 69, art. 24; Gelatt, supra note 4, at 465. 72. Gelatt, supra note 4, at 465. UPDATE ON TAXATION is that they can, for example, tax Chinese subsidiaries of foreign cor- porations on worldwide income (since they, like joint ventures, would be incorporated in China), while only taxing a division or branch of a foreign corporation on its Chinese-source income.7 Evidence of increasing Chinese tax law sophistication can be found in the deductibility of interest payments, and of certain pay- ments made by foreign operations in China to their home offices, under the foreign enterprise tax law. The Chinese show an awareness of and willingness to provide for bona fide interest payments, but the law denies a deduction for anything resembling disguised dividends. In contrast to the joint venture tax law,74 the foreign enterprise tax explicitly provides for deduction of interest paid on debt, if rates are "reasonable," and the terms documented and "normal."75 Similarly, the law provides that "reasonable overhead expenses... that are rele- vant to production and operation" and other legitimate payments to head offices abroad are deductible if properly documented.76 Hence, these provisions should allow a deduction for real business costs, while preventing disguised dividends from being expatriated tax-free. 2. Companies Without an Establishment Foreign enterprises without an "establishment" in China are sub- ject to a 20% withholding tax on gross income from "dividends, inter- est, rentals, royalties and other sources in China."77 Under the new China-U.S. Tax Treaty (the "Treaty"), U.S. companies without a "permanent establishment" are not subject to income tax in China;7 however, remitted dividends, interest, and royalties may be taxed at a 10% withholding rate.79 No deductions for these items have been spelled out.80 However, there are tax exemptions for interest on cer- tain loans and deposits ("given at a preferential interest rate") by for- eign banks and "international financial organizations."81 Foreign investors may be more concerned that the 20% tax does apply to "income obtained from the provision of various patents, technical 73. Id. at 465, n.209. 74. See generally supra text accompanying note 54. 75. FEIT Reg., supra note 69, art. 12. 76. Id. art. 11. 77. FEIT Law, supra note 4, art. 11; FEIT Reg., supra note 69, art. 28. 78. Treaty, supra note 15, art. 7. 79. Id. arts. 9-11. 80. FEIT Reg., supra note 69, art. 28. 81. FEIT Law, supra note 4, art. 11; see also Gelatt, supra note 4, at 473-74. "Interna- tional financial organizations" are such entities as the International Monetary Fund, the World Bank, and "other finance organizations of the U.N." FEIT Reg., supra note 69, art. 29- 31. 1987] JOURNAL OF CHINESE LAW know-how, copyright and trademark interests for use in China. '8 2 While this would include know-how such as "technology for creating computer programs, '8 3 tax reductions or exemptions for high tech- nology transfers may be available. 84 3. The Meaning of "Establishment" A question central to tax planning in China is what constitutes an "establishment." The law states that an establishment may include "management offices, branches, representative offices, factories and places where natural resources are exploited and where contracted projects of building installations, assembly and exploration are oper- ated."'85 However, the characterization of enterprises with substantial operations in China, or of enterprises essentially doing business from abroad, is not at issue. The "gray area" seems to involve activities carried out by representative offices or other agents doing preliminary or exploratory work. 6 Definitional language in the recently approved tax treaty with the U.S. may afford some clarification. The China-U.S. Tax Treaty contains language suggesting that an office engaged in consulting for over six months,8 7 or an office with broad authority to conclude contracts,88 would be considered a "permanent establish- ment." However, a facility used solely for storage, purchasing goods, collecting information, or "activity of a preparatory or auxiliary char- acter"' 9 would not. Such interpretative exercises may also become easier as the Chi- nese continue to legislate. For example, there are now Interim Provi- sions for the Collection of Industrial and Commercial Consolidated Tax and the Foreign Enterprise Income Tax,90 which apply specifi- cally to "permanent representative offices" of the kind discussed above. Consistent with the "permanent establishment" language of the Treaty, the Provisions subject qualifying representative offices to the progressive foreign enterprise tax, and to the consolidated turno- ver tax.9' Thus, the foreign enterprise tax sacrifices some simplicity for 82. FEIT Reg., supra note 69, art. 27. 83. Gelatt, supra note 4, at 476, n.269. 84. Id. at 477. 85. FElT Reg., supra note 69, art. 2. This language is reflected in the new China-U.S. Tax Treaty. Treaty, supra note 15, art. 15. 86. See Gelatt, supra note 4, at 464. 87. Treaty, supra note 15, art. 5.3(c). 88. Id. art. 5.5. 89. Id. art. 5.4. 90. Issued by the Ministry of Finance on May 14, 1985. TIAP, supra note 2, at 131. 91. Id. at 58. [1:93 UPDATE ON TAXATION flexibility in creating a broad plan of "corporate" taxation. Nonethe- less, it is essentially fair and no more complex than is necessary in coping with new market-oriented institutions.92 III. THE INFLUENCE OF TAX ON BUSINESS CHOICES Learning the general nature and substance of the Chinese tax laws does not complete the inquiry for the foreign investor. The stat- utes alone do not reveal the total effect of taxes on business planning. The other two major concerns are the effects of Chinese tax laws in conjunction with other tax incentives and the effect of U.S. tax law, including the new Treaty with China. A foreign investor weighing these concerns, however, may not want to take the idea of minimizing taxes as the guiding principle as might be the case for tax planning in the U.S. Rather, "a foreign company should consider such potential benefits as the goodwill and increased business opportunities that might accrue from contributing to the Chinese fisc."' 93 Two practical considerations bolster this ideal- istic principle. First, as will be shown, many Chinese taxes are credita- ble against U.S. tax liability. Second, Chinese taxes are payable in renminbi, even if levied on foreign exchange income.91 Since it is diffi- cult to exchange and expatriate renminbi anyway, a foreign business may as well pay the tax in China, accrue the "goodwill" and seek a credit back home.95 As always, the opportunity for short term gain should be viewed in light of long term growth or decline, and in light of other business goals. 92. The foreign enterprise income tax subjects enterprises with an establishment to a graduated tax on net income. Enterprises without an establishment are subject to a withhold- ing tax. This may be compared to the U.S. tax treatment of foreign enterprises. A "foreign corpo- ration engaged in trade or business within the United States... shall be taxable" according to the graduated tax and provisions governing U.S. corporations. I.R.C. § 882 (1986). However, under § 881, foreign corporations earning income such as "interest .... dividends, rents, salaries, . . .and other fixed or determinable annual or periodic gains, profits, or income" which is "not effectively connected with the conduct of a trade or business within the United States" are subject to a withholding tax. Id. at § 881. Hence, it appears that the Chinese have contrived a solution substantially similar to that used (and found workable) in the U.S. 93. Gelatt, supra note 4, at 425. 94. See FEIT Law, supra note 4, art. 13. 95. However, an enterprise may wish to make a more aggressive effort to minimize its Chinese tax liability to the extent that it exceeds the enterprise's U.S. taxes. This may be more of a problem under the Tax Reform Act of 1986. The U.S. top corporate rate will be only 34%, compared to 40% under China's FEIT Law. See id. art. 3. In general, the excess for- eign tax cannot be credited, but must be carried forward to future taxable years. See I.R.C. § 904 (1986). 1987] JOURNAL OF CHINESE LAW A. Chinese Tax Incentives Tax considerations alone may not determine a foreign investor's business choice, but tax incentives are certainly a factor in deciding not only what form of business to conduct, but where in China to conduct it. At the same time, one must be resigned to the high degree of uncertainty which may upset the most careful plans.96 Hopefully, the implementation of the tax treaty and increased familiarity on the part of the Chinese with their new tax system will help reduce this uncertainty. 1. Choice of Business Form The choices of form fall into three main categories: doing busi- ness from outside China so as to avoid progressive individual taxes and "establishment" taxes entirely, doing business as a joint equity venture, or doing business as a foreign enterprise, which includes sev- eral forms. As far as conducting business from abroad is concerned, the major tax problem is the danger of receiving establishment status due to supporting or expediting operations in China. The Treaty should enable a careful planner to avoid the danger, since the accord gives an explicit definition of "establishment." 97 However, even a company engaged solely in sales may wish to have a representative office, and a representative office with too much authority or too substantial busi- ness activity may render the company subject to the progressive tax.98 The more a foreign corporation views China as a resource rather than simply as a market, the more it will have to proceed beyond these "establishment" issues to decide between a joint equity venture or some other form. One alternative, unique in a tax sense, is to do business in China 96. The uncertainty, or flexibility, may work to the detriment or benefit of the taxpayer. For example, on one occasion Chinese tax authorities treated a U.S. law partner's income as "wages or salaries" subject to the progressive tax, contrary to the interpretation previously given the law. On the other hand, the Ministry of Finance may allow exemptions beyond the standard 800 yuan, under the personal tax law. Hannes, PRC: Recent Income Tax Develop- ments, E. ASIAN EXEC. REP., Feb. 1984, at 9, 11. 97. Article 5 of the Treaty provides in general that an establishment is "a fixed place of business through which the business of an enterprise is wholly or partly carried on." Treaty, supra note 15, art. 5.1. However, maintenance of facilities or goods in China "solely for the purpose of storage, display or delivery" does not constitute an establishment. Id. art. 5.4(a),(b). An enterprise should be aware, nevertheless, that even without a "fixed place of business" in China, it may be deemed to have an establishment if contracts are "habitually" concluded there. Id. art. 5.5. 98. However, it should be recalled that the first 250,000 yuan of income is only subject to a 20% tax, so low income operations have less of a problem. Supra text accompanying note UPDATE ON TAXATION by compensation trading. The foreign business brings goods, machin- ery or equipment to China and accepts payment in kind. Perhaps because of their acute foreign exchange problems, the Chinese are willing to tax this trade at only the 20% non-establishment rate.99 Moreover, as long as the transaction is completely "in kind," it may be exempt even from that tax under "the 1983 regulations providing tax exemptions for" advanced technology offered on "preferential terms." 1" Compensation trading, if appropriate for the taxpayer's business plans, therefore may provide a way to avoid establishment problems altogether. The joint equity venture, as already shown, provides such advan- tages as a flat tax rate, a tax refund on re-invested profits, and tax exemptions and reductions on profits in the early years.101 Other incentives have been introduced to complement these statutory bene- fits, showing again that reliance on the statutes alone is inadequate. For example, the exemption from tax in the first profit-making year has been extended to two years, and the 50% reduction now applies to the third through fifth years. 10 2 A joint equity venture may also enjoy certain exemptions from the consolidated turnover tax-such exemptions apply principally to goods imported for the venture's own use. 10 3 On an even more ad hoe basis, the Ministry of Finance is apparently willing to grant exemptions from the consolidated turno- ver tax on export sales. 10 4 Finally, as a general matter, joint equity ventures are subject to a lower rate of consolidated turnover tax than are foreign enterprises.105 Statutory tax considerations alone do not seem to favor choosing the foreign enterprise form, which includes contract joint ventures, 106 contract projects 10 7 and other wholly-owned foreign ventures. As establishments, all are subject to the progressive tax rates, and they do not enjoy the broad exemptions or reductions of tax on early profits that joint equity ventures do. However, the gap may be closing. For example, a wholly-owned foreign enterprise may now apply for a 99. Gelatt & Theroux, Tax Treatment in China, CHINA Bus. REV., Jan.-Feb. 1984, at 22, 25. No guidelines have been issued as to how to measure taxable gain realized in compen- sation trade. 100. Id. at 25. 101. Supra notes 43-45 and accompanying text. 102. Hannes, supra note 94, at 11. 103. Gelatt, supra note 4, at 500. 104. Id. at 501. 105. Id. at 500. 106. FEIT Law, supra note 4, art. 1. 107. FEIT Reg., supra note 69, art. 2. 19871 JOURNAL OF CHINESE LAW refund of taxes paid on re-invested profits."' 8 Other ad hoc incentives also go beyond the statutes to make the foreign enterprise more attractive from a tax standpoint. For example, a contract joint venture may obtain an exemption from the consoli- dated turnover tax on some items, as well as from some customs duties.109 A contract project, if it involves activities such as installa- tion or training related to an equipment sale, may be exempted from income tax through 1990.11 The same may be true for services pro- vided with a technology transfer.1 1 2. Choice of Location The Chinese have also decided to promote certain locations by means of tax incentives. Three "types" of locations provide, among other things, significant tax exemptions and reductions. The three types are: Special Economic Zones (SEZs); Economy and Technol- ogy Development Zones (fourteen Coastal Cities); and Original Urban Districts (OUDs).112 Any foreign or joint Sino-foreign venture in an SEZ is subject to a reduced flat income tax of 15%. 113 For specified enterprises with at least a ten-year contract life, other benefits include a tax exemption on the first two profit-making years, followed by three years of a 50% tax reduction.' 14 Enterprises engaged in "service trades"-if they have a $5 million investment paid in and are chartered to operate for ten years or more-may obtain a tax exemption on the first profit-making year, followed by a two-year 50% reduction." 5 An SEZ may, at its discretion, exempt enterprises from the local income tax.1 1 6 The with- holding tax on dividends remitted abroad by the foreign partner of a joint venture is waived." 7 "[O]verseas business people who have not set up offices in China" may enjoy a halved rate of 10% on income or 108. The Law of the People's Republic of China on Enterprises Operated Exclusively with Foreign Capital, art. 17 (Apr. 12, 1986) (trans. Xinhua News Agency News Bulletin no. 13603, Apr. 13, 1986). 109. Gelatt, supra note 4, at 494. 110. Id. at 496. 111. Id. at 497. 112. Provisional Regulations for Special Economic Zones and 14 Open Cities on Reduc- tion and Exemption of Enterprise Income Tax and Consolidated Industrial and Commercial Tax by the State Council of the People's Republic of China (Nov. 15, 1984) [hereinafter Provi- sions] (trans. GUIDE TO CHINA'S FOREIGN ECONOMIC RELATIONS AND TRADE: CITIES NEWLY OPENED TO FOREIGN INVESTORS (1985)). 113. Id. § 11.114. Id. § I 1(1). 115. Id. § 1 1(2). 116. Id. § I2. 117. Id. §13.1 [1:93 UPDATE ON TAXATION in some cases less," 8 and the consolidated turnover tax may be waived or reduced for many items, such as those imported for "the means of production."' 1 9 Finally, individuals working in SEZs may enjoy a reduced rate of 3% to 30% on wages, 20 and a reduced rate of 15% on income derived from sources such as personal services and royalties.12' Incentives in the fourteen Coastal Cities follow a similar course. Foreign enterprises or joint ventures are entitled to the reduced 15% rate, 2 2 and if scheduled to operate for ten years or more may apply for the two-year tax holiday and a subsequent three-year 50% reduc- tion.' 2 The local income tax may be waived.' 24 The 10% tax on dividends remitted by joint ventures is waived. 125 Enterprises without an "establishment" are again only taxed at a rate of 10% or less.'2 6 As in SEZs, there are also broad exemptions from the consolidated turnover tax. 12 7 However, there is apparently no provision for reduc- tion of the individual income tax in the fourteen Coastal Cities. OUDs provide additional incentives within "the original city lim- its of the fourteen coastal port cities and Shantou, Zhuhai and Xiamen."'' 28 In such areas, ventures offering high technology, a large investment ($30 million), or engaged in "energy, communication or harbour construction" may apply for a reduced tax rate of 15%.129 Certain other specifically listed enterprises may qualify for a 20% reduction in their respective original rate.130 Otherwise, exemptions and reductions similar to those provided in the SEZs and fourteen Coastal Cities are available. Tax incentives offer the foreign investor some options on how and where to operate. While the choice depends in the final instance on a number of business factors, tax considerations are important in the following way: since the minimum tax liabilities follow from either compensation trading, or participation in a joint equity venture 118. Id. §14. 119. Id. § 15. 120. Gelatt & Theroux, supra note 99, at 27. 121. This provision applies if, after the deduction allowance of 800 yuan, the aggregate amount of income per month is less than 4,000 yuan. If the adjusted aggregate is above 4,000 yuan, the rate becomes 20%. TIAP, supra note 2, at 124. 122. Id. at 125. 123. Provisions, supra note 112, § II 2; TIAP, supra note 2, at 125. 124. Provisions, supra note 112, § II 2. 125. Id. § II 3. 126. Id. § II 4. 127. Id. §§ II 5-7. 128. Id. § III 1; TIAP, supra note 2, at 127. 129. Provisions, supra note 112, § III 1. 130. Id. § III 1. 19871 JOURNAL OF CHINESE LAW in one of the special economic regions, the U.S. investor will want to determine whether the business he wishes to do in China can be cast in such a form. It is true that reduced PRC income taxes, while cred- itable against U.S. taxes, will probably be equalled or exceeded by the taxpayer's U.S. tax liability. However, low Chinese tax rates may help improve the enterprise's cash flow within China, lessening the need for infusions of foreign exchange by the U.S. investor. The U.S. business may also gain marginal benefit from the time value of money by paying low taxes in China, if the higher U.S. taxes can be paid later. . U.S. Tax Law and the China-U.S. Tax Treaty As a general rule, U.S. taxpayers are taxable under the Internal Revenue Code (I.R.C.) on their worldwide income. However, to relieve taxpayers from the burden of double taxation, the I.R.C. per- mits taxpayers to at least partially credit foreign taxes against domes- tic taxes, or deduct those foreign taxes from taxable income.13 1 The taxpayer may elect to take either the credit or the deduction in a taxable year.1 32 Since a credit reduces tax liability dollar-for-dol- lar, it is usually preferable. However, the taxpayer may opt for the deduction if, for example, the foreign tax burden is high relative to the U.S. tax rate, because the allowable credit per year is limited by the applicable U.S. taxes. 133 This situation may arise when income is derived from long-term capital gains (recognized in the U.S. but not in China). 134 U.S. corporate investors will be concerned with the applicability of the tax credit to China's enterprise income taxes. The key issue in this regard is what kind of taxes are creditable. The limitations on the credit available per year are also important. 131. I.R.C. §§ 901-05 (1986). 132. I.R.C. § 275(a)(4)(A) (1986). 133. P. POSTLEWAITE, INTERNATIONAL CORPORATE TAXATION 83 (1980); I.R.C. § 904 (1986). 134. POSTLEWAITE, supra note 133, at 83. However, when the 1986 Tax Reform Act takes effect, capital gains preference will be eliminated. On the other hand, overall corporate rates will drop dramatically. In some cases, then, the deduction will be more attractive, depending on the taxpayer's worldwide tax profile. Qualified U.S. individuals may further elect to exclude up to U.S.$80,000 of foreign- earned income plus limited housing expenses per year instead of taking a credit or deduction. I.R.C. § 911. The $80,000 figure applies for 1986. The Tax Reform Act of 1986 lowers the ceiling to $70,000. I.R.C. § 1233(a) as reported by the Conference Committee on Sept. 18, 1986. CCH Standard Federal Tax Reports no. 41, Sept. 21, 1986, p. 1-506. However, this election is open only to those working abroad for at least a year. I.R.C. § 91 l(d)(1) (1986). Those not qualified may seek a deduction or credit for the foreign taxes; the overall effect seems to simplify the filing of returns for U.S. citizens working abroad on a long-term basis. UPDATE ON TAXATION A foreign tax must be levied on "income" in order to be credita- ble. 135 The characterization of a foreign tax as an "income tax" is often controversial, but a taxpayer must prove certain criteria have been met. The tax must attach to realized gain, net gain, and the "receipt of income" as these concepts are understood in U.S. tax law.' 36 Also, a tax "paid in lieu of a tax on income," 137 may qualify if, for example, it effectively reaches only net gain in cases where there are "administrative difficulties in computing and applying the income tax." 138 The Tax Treaty settles the issue with respect to the various income taxes. It provides in general that the individual income tax, the joint venture income tax, the foreign enterprise income tax, the local income tax, and any "identical or substantially similar taxes" shall be considered income taxes for purposes of the U.S. foreign tax credit. 39 It is not clear whether a direct or indirect credit will be available. For example, since the joint equity venture, under Chinese law, is a "limited liability company"' 4 incorporated in China,141 it would seem to qualify for treatment as a foreign subsidiary for U.S. tax pur- poses. However, whether the enterprise will be considered a branch or partnership, thus providing the U.S. taxpayer with a direct credit under I.R.C. section 901, or a foreign corporation, providing the U.S. taxpayer with an indirect credit under section 902, will ultimately depend on definitions in the I.R.C. The main tax distinction is that, in the direct credit situation, the U.S. taxpayer realizes the income and tax liability of the foreign oper- ation concurrently, while in the indirect credit case, the U.S. taxpayer may incur the liability and obtain a credit when dividends are remit- ted.' 42 The two considerations which stand out, then, are that U.S. tax law determines both whether the Chinese taxes qualify for credita- bility, and how and when the U.S. taxpayer may use the credits. The Tax Treaty imposes no radical changes; it clarifies defini- tional issues, such as: what constitutes an "establishment,' 43 when an individual is subject to tax,144 and what types of business deductions 135. I.R.C. § 901(b)(1) (1986). 136. POSTLEWAITE, supra note 133, at 86. 137. I.R.C. § 903 (1986). 138. POSTLEWAITE, supra note 133, at 86 n.30. 139. Treaty, supra note 15, art. 2(l),(2); art. 22(2). 140. Joint Venture Law, supra note 41, art. 4. 141. Id. art. 1. 142. I.R.C. § 902(a) (1986). 143. Treaty, supra note 15, art. 5; FEIT Reg., supra note 69, art. 2. 144. Treaty, supra note 15, art. 4. 1987] JOURNAL OF CHINESE LAW are allowed. 145 The Treaty also limits the withholding tax on remit- ted dividends, interest and royalties to 10%.146 Furthermore, in regu- lating double taxation, the Treaty clarifies which kind of operation will fall in the section 902 indirect credit class: "the case of a United States company owning at least 10% of the voting rights in a com- pany which is a resident of China and from which the United States company receives dividends." 147 This certainly describes joint equity ventures, and may also apply to other enterprises organized as subsid- iaries in China. 148 The final aspect of the Treaty which is of present interest is that despite Chinese efforts it excludes any tax-sparing provisions. How- ever, China reserves the right to have them included should the U.S. grant -that right to any other country. 14 9 A tax-sparing credit would allow the Chinese to reduce taxes on foreign (or joint venture) enter- prises as an incentive, without a corresponding reduction of the credit available against U.S. taxes. So far, the U.S. has adamantly opposed tax-sparing credits.150 Presumably the United States Treasury has no interest in helping taxpayers shelter income abroad. The U.S. policy against tax-sparing credits calls into question the effectiveness of Chinese tax incentives, and therefore the value of the incentive policy for the foreign investor. These and other policy ques- tions are the subject of section IV. IV. CONCLUSION: OBSERVATIONS ON TAX POLICY IN CHINA Developing countries seek to use taxation to achieve three objec- tives: limiting and controlling foreign ownership; raising revenue; and importing foreign capital.' As the foregoing discussion indicates, China's tax system fully reflects these policies. In conjunction with China's economic laws, the tax system acts as a control on the foreign presence in China. By providing different incentives for different kinds of ventures, the tax system channels for- eign capital. Foreign investment is also controlled by the strong pres- sures and incentives to do business in specified areas such as the SEZs. 145. Id. art. 7. 146. Id. arts. 9(2), 10(2), 11(2). 147. Id. art. 22(2)(b). 148. The Law of the People's Republic of China on Enterprises Operated Exclusively with Foreign Capital, supra note 108, art. 2. 149. Letters of Agreement to Treaty, supra note 15, 1 CCH Tax Treaties 1445 (exchanged in Beijing on Apr. 30, 1984 by President Reagan and Premier Zhao Ziyang.) 150. Schreyer, A Guide to the China-U.S. Tax Treaty, E. ASIAN EXEC. REP., Aug. 1984, at 13. 151. Kingson, The Coherence of International Taxation, 81 COLUM. L. REV. 1151, 1163 (1981). UPDATE ON TAXATION To raise revenue, the Chinese have imposed the broad-based taxes outlined above. Individuals, state-owned enterprises, collectives and the other types of Chinese and foreign business entities are all subject to taxation. It is true that as recently as 1980 it was still possi- ble to ask, "Why should the state tax the profits of an enterprise when the profits accrue to the state anyway?"' 52 However, the Chinese studied established models when developing their own plans to raise revenue from foreign investment. For example, to formulate their joint venture tax laws, the Chinese looked to Yugoslavia and Romania as models.' 53 Finally, the Chinese have demonstrated at least the intent to use tax to encourage the influx of foreign capital. This intent manifests itself in the form of tax holidays for certain enterprises and in the attempt to include a tax-sparing provision in the Tax Treaty with the U.S. 154 However, the use of tax incentives to attract foreign capital may be questionable policy. As we have seen, the absence of tax-spar- ing credits means that profits realized through Chinese incentives are nullified by U.S. taxes. 15 Indeed, it has been argued that "[t]here is no rational basis for using tax incentives as instruments for inducing the flow of [direct foreign investments]." 1 1 6 Professor Robert Hel- lawell has suggested that tax incentives are inherently ineffective, and that tax incentives may have little influence on business planners' decisions on where to invest. 157 However, even though tax incentives may not attract foreign capital, they can nonetheless fulfill the func- tion of controlling the form and location of ventures within China. Judging from the evidence of the recent past, it seems reasonable to conclude that the tax system will not change radically in design, although details may change to serve commercial growth and the development of capital markets in China. Barring radical shifts in Chinese politics, it is likely that the U.S. investor can depend on the 152. Reynolds, Doing Business with the PRC: Tax Considerations, 14 INT'L LAw. 49 (1980). 153. Id. at 62. 154. See Letters of Agreement, supra note 149. 155. However, given the reduced rates in the U.S. under the 1986 Tax Reform Act, the statutory Chinese tax may now be more likely to exceed the U.S. tax in some cases, making Chinese tax reductions more valuable. 156. Yelpaala, The Efficacy of Tax Incentives Within the Framework of the Neoclassical Theory of Foreign Direct Investment: A Legislative Policy Analysis, 19 TEX. INT'L L. J. 365, 414 (1984). For Yelpaala's discussion of the neutralizing effect of the tax credit, see id. at 395-96. 157. Hellawell, U.S. Income Taxation and Less Developed Countries: A Critical Appraisal, 66 COLUM. L. REV. 1393, 1412 (1966). 1987] JOURNAL OF CHINESE LAW tax system to continue to take a familiar form in responding to the needs of Chinese and foreign business. Jonathan Miller* * J.D. 1987, Columbia University. UPDATE ON TAXATION -. p &Z Z , "- u u a ;t: v v 0,CZ w 22 -, -4bz-i " v .0 0-ru- 'o t 5 0 L= a bo En, 0 0 CL 42 -;; v cz = 43 = Q F. 04 F- F. Cl cz .0 Q "0 0 - 04 ell "'V U 19871 0 uz rU€