Yuan Watch : Petitioning the Big Red Dragon

By SHEN HONG and DENIS MCMAHON
December 27th, 2008
Wall Street Journal

SHANGHAI -- A group of foreign banks in China has asked the Chinese government to delay a recently imposed tax on interest paid on money borrowed from overseas, arguing that the tax would exacerbate the impact of the global financial crisis.

The request concerns a new withholding tax on interest payments on all loans to banks in China from overseas lenders. The tax, which is retroactive to Jan. 1, is expected to disproportionately affect the Chinese operations of foreign banks, which are more likely to borrow from overseas sources, such as their parent companies. Chinese banks typically have large deposit bases, so are less reliant on borrowing from overseas.

A petition signed by 36 foreign banks, seen Friday by Dow Jones Newswires, describes the tax as an excessive burden on foreign lenders operating in China. The petition was signed Dec. 23 and addressed to China's State Council, its banking regulator, its central bank and the Ministry of Finance.

The new tax is technically directed at the offshore lenders, saying they must pay tax on the interest they earn on loans made to banks in China.


However, the China-based entity is responsible for paying the tax on the lender's behalf, the statement said.

Under China's corporate income-tax regulations, a 10% withholding tax will be broadly charged, but a lower rate of 7% will be placed on lenders from places with which China has a tax treaty, such as Hong Kong.

A cover letter for the petition from accounting firm Ernst & Young said the measure, together with recent changes to the banks' business tax, could roughly add an additional 1 billion yuan ($146.2 million) to the banking sector's tax bill this year.

"As far as an independent bank is concerned, this could be the difference between surviving the financial crisis or not," the accounting firm said in the letter addressed to the tax bureau.