China Criticizes Foreign Firms, Global Fight on Multi-National Corporations Imminent?

On October 14th, 2014, the state-run newspaper People’s Daily accused many multinational and foreign corporations in China of exploiting legal loopholes in order to avoid taxes and pocket the majority of the profits. According to both academics and policy-makers in the Chinese government, this practice deprives China of “enormous revenue, even though [the foreign firms] had taken advantage of [China’s] labour, land, recourses, and huge market.” This is yet another step in China’s attempt at enforcing an antitrust campaign to supposedly create more room for its domestic firms to grow. This recent news illustrates two important trends. First, China is taking its anti-corruption campaign seriously, moving it beyond mere rhetoric. Second, countries across the world are expressing displeasure at multi-national companies’ (MNCs) tax dodging practices.

This recent anti-trust campaign represents China’s desire to fight corruption at all levels of society. President Xi Jinping has already taken on several of China’s largest state-owned enterprises (SOEs), businesses that are controlled by the Chinese government and represent the foundation of China’s model of state capitalism. There are about 155,000 SOEs in China and in recent years, public anger has been direct at these businesses for perceived corruption and graft. With many of the top executives at the largest SOEs obtaining millions in salaries or kickbacks, their corruption has put a strain on China’s economy. Since many Chinese citizens are understandably displeased at the level of corruption in their government, it is possible that tackling corruption is a strategic move aimed at not only strengthening China’s economy but also appeasing public opinion.

Xi’s anti-corruption campaign led to the ouster of several top executives in some of the largest SOEs. Song Lin, accused of serious violations in law and discipline by the central government’s discipline committee, was removed as chairman of China Resources, one of the largest investment-holding SOEs. He is not the only casualty of the anti-corruption campaign. Jiang Jiemin, former chair of oil giant PetroChina, “was found guilty of taking advantage of his post to seek benefits for others and extorting and receiving a huge amount in bribes.” These high level arrests demonstrate that China seriously wants to reduce the rampant corruption and graft in SOEs.

Subsequently, it comes as no huge surprise that China has now moved from SOEs to criticizing certain MNCs, the next logical target. As shown from the article in the People’s Daily, these MNCs have been singled out because they refuse to pay taxes while using Chinese resources. Their tax dodging acts are similar to the corruption of the SOEs in that both deny the Chinese government important resources and much needed additional revenue. Moreover, there is an economic link between the two. Many experts have argued that the Chinese economy will slow this year as a result of the anti-corruption campaign, which has reduced spending in high-end hotels, automobiles, and many other luxury goods. Since China will need to find some way to recoup these losses, encouraging these tax dodging firms to pay taxes seems like a good way to gain revenue.

Another interesting aspect of this article is that it represents renewed global anger at MNCs. In the past few months, the United States has launched a campaign against the practice of inversion, the process of re-incorporating a company overseas in order to reduce the tax burden on income earned abroad. The US Treasury Department has launched tougher regulations to prevent inversion from happening. So far, the biggest targets of these toughened rules have been fast food chain Burger King and the drug company AbbieVie. While Burger King decided to continue on its merger with Canadian food company, Tim Hortons, AbbieVie has reconsidered its merger with Irish company Shire PLC and stated that the inversion rules may prove too much of a burden for the merger to take place.

The logic behind these new rules is similar to China’s new war on foreign companies. Both countries highlight the absurdity of corporations paying little to no taxes for access to a country’s resources and labor. There are, however, important differences behind these two countries’ actions. For China, the government dislikes those foreign firms that drain Chinese resources without paying taxes. On the other hand, the United States has tried to prevent its own domestic firms from going abroad to enjoying a lower corporate tax rate. The reason for these different approaches is due to the variation in their economies. China’s slowing growth rate will mean it will need additional resources, which accounts for the increased taxation of MNCs. Meanwhile, the United States’ most important concern is creating jobs, which is where the restriction of inversion practices to keep jobs on American soil comes in. Either way, both countries seem to be exhibiting less patience for the tax dodging practices of MNCs.

The actions by China and the United States are only following the global trend, spearheaded by the European Union. The EU has already been leading the charge against corporate tax dodgers. Because of its single market, companies cannot invert themselves like they can in the United States since the tax rate is virtually the same across the continent. Additionally, the EU has taken the most action against tax loopholes, moving against Apple and Google. Between the EU, the US, and China, this marks a super-majority of the world’s economy and population. If these three entities continue their pressure on corporations, then the days of corporate tax dodging may finally be coming to an end.

Still, before that can happen, China will need to demonstrate its commitment by following up its words with concrete action. It remains to be seen whether or not China will be able to muster the requisite willpower to really take on these influential MNCs, which have considerable economic clout. While scapegoating the MNCs may be a politically savvy move for now, there will be repercussions in terms of China’s reputation for investment friendliness. If nothing else, the Xi administration should think it through carefully.