From: Experience Not Logic – 不经一事，不长一智 Business and Law in China…
Tuesday, June 2, 2009
And Asia is Now the #1 Source of Foreign Earned Income for US Taxpayers
Recent report in the BNA Daily Tax Report on the just released Spring 2009 Statistics of Income Bulletin from the IRS announces that Asia eclipsed Europe in 2006 as the continent where US taxpayers had the highest amount of foreign earned income. The $14.7 billion of foreign earned income in Asia represents a 29.1% real dollar growth over 2001. Though the increase in income in Iraq from $0 in 2001 to $1.8 billion 2006 drove a lot of this increase, foreign earned income in China also made a contribution to growth with a real increase of 110.2% to $1.7 billion. With regards to China, this must mean one of five things:
1) US citizens working in China earned 110.2% more in 2006 than in 2001;
2) There were 110.2% more US citizens working in China in 2006 than in 2001;
3) There were less US citizens working in China in 2006 than in 2001, and they earned proportionally more than 110.2% in 2006 than in 2001;
4) There were more US citizens working in China in 2006 than in 2001, and they earned more per capita in 2006 than 2001; or
5) There were more US citizens working in China in 2006 than in 2001, and they earned less per capita in 2006 than 2001.
If we assume that the number of US citizens working in China increased during this time, then we can eliminate 1-3. I’m going to pick number 4 for bubbalicious reasons (as 2001 was a year after one bubble burst and 2006 was the year in which another burst) and because I can’t find good data on the number of US citizens living in China in 2006 and 2001 which would give us the correct answer.
It should be noted that foreign earned income refers to income earned by US citizens performing personal services in foreign countries.
Monday, June 1, 2009
What is Up With the Taxation of SOEs?
Have you ever wondered if SOEs get taxed? If they do get taxed, why? I knew that SOEs were owned by the state, but I had never made the leap to think about how the state benefits. If you asked me, I guess I would say through distributions… But how can shareholders, even a government shareholder, compel distribution? Well if these questions have ever taxed your mind, even if a newly promulgated tax on thought, I’d recommend reading Income Taxation of State-Owned Enterprises: Theory and Chinese Evidence by Professor Cui Wei of China University of Political Science and Law. I’m going to briefly summarize Professor Cui’s description of the traditional theories on SOE taxation, and then summarize his theory of why SOEs are taxed. But first, some threshold issues.
SOEs in China, and in many countries, are subject to income taxation. In China, they are subject to the same tax as private enterprises under the EIT, though SOEs do tend to be among the most aggressive in seeking favorable tax treatment. Tax on SOEs might be conceptualized as a distribution by the SOE to its shareholder, the government. This carries one major caveat: the shareholder does not pay any tax on its constructive distribution which eliminates considering the important tax planning issue of structuring distributions to best advantage the shareholders’ tax liabilities.
The first theory for SOE taxation is that “SOEs are taxed because they have mixed public and private ownership.” Professor Cui does not think that this explains SOE income taxation because there is no good reason why an SOE with mixed ownership should be taxed in the same way as a private firm.
The second theory for SOE taxation is that “SOEs are taxed because the government that owns them is not the government that taxes them.” In federalist countries such as China, SOEs can be subject to a dual layer of provincial and national taxation. Even though an SOE might be owned at a provincial or municipal level, part of its constructive distribution is withheld in Beijing with the rest distributed to the local governments to cover the SOEs tax liability at and below the provincial level. Professor Cui argues tha this explanation fails because there are much better ways than the income tax system for equitably distributing an SOEs profits.
The third theory for SOE taxation is that “SOEs should be taxed because that is necessary to ensure that they are competitively on an equal footing with private firms.” Professor Cui notes that this view may be prevalent in developing countries. Professor Cui concedes that competitive reasons are a fair explanation for other taxes such as VAT, but “the price affected by the corporate income tax is the price of capital, and SOEs and private firms generally do not compete for the same investors, unless the SOEs are being privatized.” Thus any income tax is simply a burden borne by the government because different tax rates for SOEs’ profits would have no effect on SOEs’ ability to attract more government capital.
Instead of relying on these theories, Professor Cui proposes that SOEs are taxed, at least in China, for the sole purpose of ensuring (and forcing) periodic distributions to the government shareholder. Professor Cui argues that for his theory to prevail, SOEs must be averse to the payment of income tax. Despite their tax paying braggadocio, Professor Cui points to substantial evidence that China SOEs are as averse as their private enterprise counterparts to paying tax, thus substantiating his theory.
All in all a fine read, and I look forward to further refinements to Professor Cui’s analysis as many of the questions he leaves unanswered for lack of evidence are fielded.
Posted by Will Lewis
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