Foreign banks angered, battle new China tax

Foreign banks angered, battle new China tax

BEIJING (Reuter): Foreign banks in China have launched a drive to persuade Beijing not to impose a withholding tax on inter- branch and interbank funding that they say would make doing business in China unprofitable.

The new tax, payable from July 1, is not levied on domestic banks, leaving foreign banks at a tremendous disadvantage against their Chinese competitors, foreign bankers said.

"Such a withholding tax will have a large impact on foreign banks," said Maurice Lee, manager of the Beijing branch of the Hong Kong and Shanghai Bank.

Signs have emerged that the central bank, the People's Bank of China, and Shanghai authorities have reservations because of fears the tax would deter foreign banks from doing business in China.

Sources in Shanghai said city officials were unhappy with the new tax, imposed by the State Administration of Taxation in Beijing, because they feared it would harm their bid to develop the city as China's financial heart.

The measure has yet to be implemented, bankers said.

While foreign banks in China are not allowed to set up a lobby association, they have formed an informal grouping to present their views to the central bank and were awaiting a formal reply, bankers said.

Tax authorities issued a notice to foreign banks last month informing them they would be liable for tax on interest payable on funding by overseas banks to branches in China.

The circular notified foreign banks that they were no longer subject to the exemption enjoyed by Chinese state banks.

"Therefore interest income derived from loans by foreign banks to foreign-invested financial institutions shall be levied with income tax," it said.

An official of the Shanghai Tax Bureau defended the measure, saying it ensured fair competition and would have little impact on the costs of foreign banks.

The withholding tax of 20 percent -- or 10 percent for countries with double taxation accords with China -- would help to create a level playing field since foreign banks pay 15 percent income tax on foreign currency business while the rate for domestic banks was 33 percent on both yuan and foreign currency business, he said.

The central bank conceded the tax would have an impact.

"Foreign banks in China can still borrow from overseas banks, but their costs will increase," a bank official said.