China’s tax and non-tax instruments responding to its weakening attractiveness to foreign capital

Abstract

This paper studies China’s weakening in its attractiveness to foreign capital, especially since its implementation of new corporate income tax law in year 2008, which phased out the former preferential tax treatments for foreign invested enterprises and the placed-based favourable tax policies for various special tax zones. Empirical evidence and the major factors causing this weakening in attracting foreign investment are discussed. This paper also studies the major tax measures, fiscal measures and non-tax measures adopted by China central and regional governments, which are aimed to improve China’s competitiveness in attracting foreign capital. The major contribution of this paper is its discussion on China’s good practice of making use of nonta Xmeasures to attract foreign capital, which is effective in avoiding harmful international ta Xcompetition. The other contribution of this paper is the discussion on the economic foundation (i.e. China’s comparative strength and state ownership of lands) which makes these non-tax measures feasible. China’s good practice of adopting non-tax measures and making use of its comparative strength is of reference value to other capital importing countries in the world.