Jun 22, 2009
Protectionism in China. Can India create an example for China to thaw?
The tax avoidance by Foreign invested companies in China is in fact something faced in equal measure by India(e.g. Vodafone) and also true for Offshore structures channeling spurious domestic investment back into the country. The lack of taxation benefits brings on real challenges to the valuations and the profit in a deal, however, the huge amounts of money involved would definitely help the starved economies in question.
Tax benefits partaken by investors thru such means are increasingly being questioned because these inflows thru relevant taxation ensure participation of the government involved and bring relief to the local economy.
Increasingly, one finds that tax shelters sold by KPMG, PWC, UBS and others are being questioned fairly and squarely for the lack of oversight and their dependence on local and international corruption. each such deal only increases more misconfidence in the market because of the noise on ethical practices and such practices are no longer recommended
It would arguably generate more significant value to the deal if tax compliance is studiously undertaken and the resultant hit in this case would not exceed 10% on Capital Gains and a maximum amount of the same 10% for Dividend withholding. Thus any transaction is unlikely to be charged more than 10%. Dividend withholding at higher rates may however be used as a negative policy instrument by the still very communist and market unfriendly government in China. The protectionomics of the same cannot be argued with only because they have no other examples for protection policies in the civilised world today and that does hamper evaluation of this risk for them and for the Developed World at large
US and India have to follow in no small measure as the Brazil-China-Russia axis is likely to spin out more and more local government friendly laws and suspend criticsal trade flows and liquidity
US and Indian tax authorities have made a critical start by ensuring that tax laws are observed. Th author looks forward to more becoming protection flavoured critical instruments of policy as undue leverage and the failing greed of hedge funds fails in the last leg of reflexivity to repair the market in time.
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