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Home Policy & Regulations

Cost of Doing Business in China Rises

USCBC by USCBC
January 1, 2011
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by Christina NelsonTwo recent PRC government policies will increase the cost of doing business in China, a top concern of many US companies. The recently passed Social Insurance Law will soon require foreigners working in China to participate in China’s social insurance system. Separately, a new PRC State Administration of Taxation notice required foreign companies to pay education and urban maintenance and construction taxes beginning December 1, 2010.

Social Insurance Law

The Social Insurance Law, which will take effect July 1, 2011, consolidates previous regulations on pensions and health, work injury, unemployment, and maternity insurance. The law will benefit uninsured foreign nationals, but will likely impose additional operating costs on companies that already provide international insurance coverage for their employees. The new law does not specify whether employers must contribute to all five forms of social insurance for their foreign employees.

Employers currently contribute a percentage of their total payroll—and Chinese workers contribute a percentage of their monthly income—to China’s social insurance system. Contribution rates vary by city. A company in Beijing currently pays a combined 20 percent of payroll to the city’s pension system and employees’ individual accounts; employees contribute 8 percent to their individual accounts (see Table).

Insurance premium calculations are based on an employee’s average monthly wage. The premium cannot be higher than 300 percent of the city-wide average monthly wage, which is set annually by the local human resources and social security office. Beijing’s average monthly wage was set at ¥4,037 ($608) for 2010.

It may take several years for local authorities to implement the new law, according to Andreas Lauffs, head of the employment law group at Baker & McKenzie LLP, who recently spoke to US-China Business Council (USCBC) staff about the law. Lauffs noted that the law will increase payroll costs, but the cap on premiums will keep costs from skyrocketing. More important for companies, Lauffs said, is that “this law for the first time…has some teeth. It provides for social insurance authorities to actively force employers to contribute.”

According to the law, government officials will require banks to turn over funds from a delinquent company’s bank account or require collateral for missed payments. The law also allows officials to seize and auction a company’s assets and use the proceeds to pay outstanding social insurance premiums.

The law aims to create a nationwide pension plan and a medical payment system that allows people to use medical insurance outside their home cities. It will also prevent local governments from using social insurance funds to balance government budgets, build and renovate offices, pay personnel, or cover other expenses.

cmi chart

Two new taxes for foreign companies

Also contributing to rising costs in China, foreign companies were required to pay education and urban maintenance and construction taxes starting December 1, 2010, according to an October 2010 State Council notice. The maintenance and construction tax is levied at 7 percent in urban districts, 5 percent in town districts, and 1 percent in other regions. The education tax is set at 3 percent.

The PRC government has long exempted foreign companies from these taxes to encourage outside investment. After China passed the Enterprise Income Tax Law in 2007, however, corporate tax incentives for foreign firms gradually disappeared. The law aims to set the corporate tax rate for foreign and domestic enterprises at 25 percent by 2012.

[author] Christina Nelson ([email protected]) is associate editor of the CBR. This article is adapted from a report that first appeared in China Market Intelligence, USCBC’s members-only newsletter. [/author]

Tags: China Market IntelligenceRising CostsSocial Insurance
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