Foreigners in China squeezed by taxes

Foreign firms, employees under tough pressure from pension, tax changes


BEIJING (AP) ― Foreign companies that are looking to China to shore up wilting global sales have been hit by higher payroll taxes, surcharges to subsidize unions and other changes that are making conditions tougher just as economic growth slows.

The biggest worry for many is an abrupt order for foreign workers and their employers to start paying up to 40 percent of their wages for pensions and other welfare. Automakers face a possible tax hike, while tax authorities are testing a system to collect dues for China’s umbrella labor group from companies without union workers.

The changes come against a backdrop of critical coverage by state media of product safety and other complaints against high-profile corporations such as Wal-Mart Stores Inc. and energy giant ConocoPhillips Co. Companies also are uneasily awaiting the release of new patent and copyright rules they worry might push them to hand over technology.

The pension and medical charges took effect Oct. 15, less than six months after they were announced. Companies scrambled to come up with the money while employees wonder whether they will ever be able to collect the benefits.

The cost “may make the difference for some companies between a profitable year and an unprofitable year,” said Adam Dunnett, deputy managing director of the Beijing office of consulting firm APCO Worldwide.

The changes have prompted questions about whether Beijing’s attitude toward foreign companies that invested $105 billion in China last year and employ nearly 10 million Chinese workers is souring.

The communist government needs their investment and skills to develop its computer, auto, energy, telecoms and other industries but sees them as rivals to Chinese companies it wants to build into global competitors.

“China’s enthusiasm for foreign companies is certainly waning,” said James Zimmerman, a partner in Beijing with the law firm Sheppard Mullin Richter & Hampton who has worked in China for 14 years. “The government has become more selective in the types of investments permitted market access and more critical of those investors that are either out of favor or perceived as troublemakers.” 

Those hit hardest by the social charges will be consulting firms, international schools for foreign children and others with big foreign staffs that account for up to 70 percent of their costs. The impact on manufacturers should be limited because foreign employees are a small share of their workforces.

“This year we are probably going to just have to absorb it, which will probably cause us to show a loss,” said Tim McDonald, headmaster of the International Academy of Beijing, which has 260 students and 45 foreign employees.

Foreign companies are on edge about patent and copyright rules due to be released soon under an anti-monopoly law enacted in 2008. A vague section of the law forbids abuse of intellectual property to hamper competition and companies worry it might be used to compel them to give know-how to Chinese rivals.

It is unclear whether the changes are related but they come at a complex time for the communist leadership both financially and politically.

Beijing needs to raise revenue to fulfill promises to improve schools and health care for China’s poor majority. That comes as Communist Party factions wrangle over next year’s handover of power to younger leaders ― a politically tense period when looking sympathetic to foreign companies can be a liability for officials.

The changes add to pressure on foreign companies just as China’s rapid economic growth slows. It eased to 9.1 percent in the three months ending in September from the previous quarter’s 9.5 percent ― the result of a clampdown to cool the overheated economy. Growth is expected to wane further as Europe’s debt crisis and a sluggish U.S. economy erode demand for exports.

Business groups have long complained that Beijing hampers access to banking, construction and other industries in violation of free-trade principles. More recently, they say it might be trying to push foreign competitors out of promising fields such as clean energy.

Washington’s ambassador to the WTO complained in a Nov. 30 speech that Beijing is retreating from free trade and increasing its role in the economy despite its pledges to allow free competition.

Chinese officials argue the charges for pensions, unemployment and health benefits will provide a safety net for foreign workers and are similar to those imposed in Europe, the U.S. or Japan. But the speed of the rollout caught companies unprepared after they already had made annual budgets.

“They are struggling to cope,” said Dunnett. “Costs will go up and companies will have to make tough decisions on hiring as a result.”

There were an estimated 590,000 foreign nationals living in China last year and 231,700 had work visas, according to government data. Foreign companies in China employed 9.8 million people in 2009, the last year for which figures have been reported.

The social welfare charges vary by city. In Beijing, they will cost foreign workers and their employers a total of up to 3,780 yuan ($590) a month for pensions and medical insurance. It is unclear how foreign workers can collect pension or unemployment benefits, because those who retire or lose their job usually lose the visa that allows them to stay in China.

Meanwhile, a tax change could raise costs for foreign automakers or other companies that operate several lines of business such as sales, production or financing and are required by the government to register them as separate corporate entities.

Tax authorities say they will treat money moved among those entities, such as profits from auto loans that are reinvested in manufacturing, as being taken out of China and impose a tax ― a charge that would not apply to Chinese competitors.

At the same time, companies such as retailer Wal-Mart Stores Inc. and energy giant ConocoPhillips Co. face a wave of critical coverage by state media of grievances against foreign companies.

ConocoPhillips has been lambasted over leaks in June from an offshore field on China’s northeast coast that released about 700 barrels of oil and 2,500 barrels of drilling lubricant. Five months later, the press still is reporting on the spill and the government’s declaration that it was due to company negligence. A spill 15 times bigger from a pipeline owned by China’s biggest state-owned oil company disappeared from the government-controlled press after a few days.

Wal-Mart, which has nearly 100,000 Chinese employees, was forced to close 13 stores for two weeks and two employees were detained on charges of mislabeling pork as higher-priced organic meat, a penalty industry analysts said was excessive.

The measure to collect union dues follows a multiyear campaign by China’s umbrella labor group, the All-China Federation of Trade Unions, to set up unions in foreign companies.

Under a pilot project, tax bureaus in some districts of the Chinese capital have begun charging foreign companies the equivalent of 2 percent of workers’ wages to pay for activities by ACFTU-affiliated unions, according to Zimmerman.