We talked to the Secretary General of the European Union Chamber of Commerce in China about the effects of a change in taxation policy in relation to foreign firms operating in China.
The original transcript of the interview was edited for clarity.
Economic Observer: As you know China will levy two additional taxes on foreign capital. There has been a saying that it is the end for foreign capital in China enjoying 
supranational treatment. Do you agree with this?
Dirk Moens: First let me say that I do not like the term "supranational treatment". I don't like it because I think it gives an image as if foreign investment companies received all kinds of gifts and favors from the government. I think that's the wrong image. I think we need to make a distinction between incentives to attract FDI and tax incentives when a company is already in a steady state of operation. They are two different things.
I think with the term "supranational treatment", people confuse things. Any region in the world attracts FDI by giving incentives. The reason they do that is they think that the investment that comes in, in the long term will pay back more than the incentive that they received. Otherwise governments would not give incentives. They are not Santa Claus. They do it for a reason and the reason is they want to be competitive with other regions in the world to attract FDI. That's one thing and I think that will still exist. I think that if Chinese companies want to go to Europe there are regions that want to give them incentives to attract FDI into Europe. That's nothing special. That's nothing supranational. That's nothing that is only exclusive for China. It is a practice across the world.
The second thing is once the companies are up and running, the companies need that initial incentive to help them start because companies have startup costs. If companies go and make a new investment there is a charge; there is a heavy load so therefore companies need some kind of incentive to get over that bump that they face in the beginning. Once they are over that bump they are in the steady state of operation, then they should be able to compete equally with any other company in the market. I understand that the measurements in place that started yesterday do exactly that. They look at the tax regime for foreign companies, and they say, well foreign companies should be treated equally with domestic companies. I think that's fair if those companies are in a steady state of operations. Then they should be able to compete equally with domestic companies including on tax.
Equal treatment should apply to everything - all business aspects. For instance, foreign companies should have access to subsidies for research and development. The same as domestic companies have access to those incentives; foreign companies should be able to enter in all areas of industry to compete, so there should be no restrictions on where they can compete and where they cannot. By the way that is something that they have in common with private companies in China. There are still areas of industry or services that are banned from private companies or foreign invested companies. We believe that the opening up in China that we have seen lately should continue and give more access to those areas of today that are not accessible to private companies and foreign invested companies. I think that's fair. If that is done then it is only up to the company to be competitive. You know European companies come from a very mature market. They are used to competing so it's not something they are afraid of. Some will succeed and some will fail. That's life. We think that no company should be in the long-term kept artificially alive. We believe in fair and open competition and for open markets.
EO: Do you think that the new tax policies are bad news for foreign companies' competitiveness?
DM: I think here we need to make a distinction between foreign companies that operate from the Chinese market and foreign companies that operate to export. And in the Chinese market, again, if this tax is applied to all players in the industry it does not affect competitiveness. I think on the other hand, European companies are used to increasing productivity, to increasing efficiency, to improve energy consumption and so on. If anything, it should give them an advantage because they have the technology and they are used to compete very fiercely. So I don't think it's a big deal in the competitiveness for those companies that are active on the Chinese market. Obviously anything that affects the cost structure of a company that exports might potentially affect the competitiveness of a company.
EO: So you think the expenditures of corporations might rise ten percent?
DM: Obviously when you have to pay more tax your cost structure goes up. It depends a lot on what type of industry you are looking at so I don't think you can say it will be 10 percent on average. It depends on the cost structure of a company. Some companies are very capital intensive so the big chunk of costs will be to pay for their machinery. Others are labor intensive so it is the labor costs that drive a big chunk of their costs structure. So it depends a lot on the structure of a given industry to define what will be the impact of this additional tax.
EO: In September you launched a paper in which you mentioned that improved market access and a level playing field are necessary for your companies. So our question is do you think foreign companies value more than a tax preference?
DM: When we ask our companies, and we do it every year, why do you choose to invest in China? 95 percent of our members say that we are here for the Chinese market. It is not illogical; China is the single most important growth opportunity in the world. Especially since the crisis, other regions are more depressed. China, with the help of the government stimulus program, has kept a very high growth, so it's not surprising that companies see China as a market that is not only big, but growing very fast. If that is their first reason to be here, access to that market becomes very important. One thing is to have a great market opportunity in front of you. The other thing is to see how you can take part in it.
People talk a little about win win. It is a win win because if you do not have anything to bring to that market then you won't get in. Companies need to think what is it that I can bring to that market that gives me a competitive advantage. Is it my technology? Is it the way I run my business? Is it skill that I have already because I'm a big player all over the world and I have skill? Is it research and development capabilities? Once you have developed your advantage and you bring it to China and you don't get market access then it's a waste. You want to get something back. You have costs, you have shareholders, you have cost of capital. You invest, you take risks, and you want to be rewarded. The reward needs to come from creating business in the market. Market access is the biggest single concern that companies have. Once they are in the market there will be concern about increasing market access, so they would like to see the government open up more so they can receive market access in other areas.
EO: Is this the most important?
DM: It is very important, yes. Another element that we would say is that once you are in, once you have access, once you are competing, you want to have a very level playing field in terms of regulatory framework. So the regulations need to be applied very similarly across the industry because if that is not the case then you have a barrier and then maybe you don't get the full rewards for what you might expect for what you brought to the market. You bring your research and development, some of those companies that come here they bring products and bring technology or processes that they worked on for ages, decades, so they really want to and they make their business plans counting on return.
Like the government makes five year plans, companies also make two, three and five year plans. So another big concern is if they cannot reach their plans because there are barriers in their way. So there are two big concerns. The first is to get in, to get access into the market, to capitalize on what you have been building. It's not as if FDI are scavengers. We are here to bring something to the market and we expect a return. It's not that we are just out and trying to conquer the market. That is not the point. The point is that we are trying to exchange.
EO: In terms of exchange, what can a government do to achieve the commitment, to be treated the same?
DM: First of all, we need to acknowledge that China has made enormous progress. One thing I would like to share with you, I'm not sure that it's the right message for the interview, but it's very difficult for us to get that message across. When we read a newspaper, either the Chinese press picks up on what we say that is good, or the international press picks up on what we say that can be improved. China has the potential to bring enormous value for companies; there is no doubt about that. Companies are grateful that they are here, and that the market already exists.
On the other hand, they also see that there is a lot that can be done to make the environment more competitive for them, i.e. less barriers; some areas are still banned and they cannot get in. There are restrictions such as restrictions in ownership; we cannot have more than 50 percent in ownership for instance. Maybe the restrictions seem reasonable, but you have to compare them with the conditions in Europe where those limits do not exist. If my Chinese competitor goes to Europe, they do not have that barrier. But when I come to China, I do. It is not equal, and they will continue to talk about that.
The message is yes, China is important both in size and growth. We have seen progress in the past 50 years, with the WTO and so on. We all acknowledge that. But we still see the things that can be improved upon.
The two big areas are legal regulations and market access.
And we will continue to speak up because that is our job. The mission of the chamber is to distill the issues at an industry level, but not for particular companies. If we do that we will give them a competitive advantage. We put the competitors around the table, and we ask what the common industry problems they see in China are. And that is how we compile the list of conditions that we have in the book. It's not only identifying the issue; it's coming up with suggestions and recommendations. Most of the ministries we talk to have acknowledged that there are definitely elements in that book that they value a lot. And some other ministries say that it is stupid. But that's life.
We ask whether companies think China is important in terms of future foreign investment. They answer yes, at least for the next three to five years. China will stay important.
EO: How will they react to the new Tax policies? Will they make any changes?
Again, it depends on the industry. If you are in a very competitive industry, you will not translate additional costs to your sales prices. I read in a newspaper, China Daily or Global Times, about the retail department in Shanghai. It's extremely competitive, and they are suffering because of inflation. They cannot increase their prices and their costs increase. If you are in an environment like that, it is very difficult to translate cost into sales. And by definition, your profitability goes down.
In other industries, the increase in tax pressure will be translated into price increases.
EO: In September, after you presented the paper to the government and the regulation departments, how did they react?
DM: We received a strong reaction this year. It is reassuring. We have heard it on many occasions, from the very highest levels of government, that foreign companies will be treated the same way as domestic companies. What still needs to be done, is for the reassurance to translate into the day to day and the 200 or 300 points in our paper where we think progress can be made.
We are realistic. We know our 300 points will not be solved in a year, but we think it is important to keep an inventory of what the European industry thinks is important. This is a valuable tool. The chamber allows them to have a view of the industry without them having to speak to all the individual companies. The goal of the chamber is to distill the issues, to concentrate them, bridge them and bring them to policy makers and explain them to think tanks, and influence the policy making. We have also noticed easier access and better bylaws from some ministries. It is extremely important and we put that in the summary. Also, policy makers need to know how the new policies will influence the industry, they need to have dialogues and communicate with industry. Maybe they had underestimated the importance of certain policies to certain industries; that can go until putting the policy at risk. One policy can close a company down.
EO: Has that happened before?
DM: We have had companies go from being the market leaders of an industry to being in trouble. They have had to pay a very high price to conform to policies. For example in a very specific industry, credit information, information on credit cards; because of policies related to intellectual property, transparency etc. ownership restrictions, the company got into a squeeze. It can also affect the whole industry. In this country every procurement is a big chunk of the market. A lot of economic activity comes from state owned enterprises or companies related to state owned entities, and with public money. Policy related to public procurement can have a huge influence on the total market of one industry.
EO: What else can China do?
DM: I think it would be good to have more independent business associations for domestic players. It would be interesting for us if there were independent business associations to discuss common concerns with. There would be more information for the government, because we see overlap between our concerns and the concerns of privately-owned companies. We face 80 percent of the same concerns, and dialogue is important.
Another thing is opening up. We think, especially in services, there is a lot foreign investment can bring to development in industry. I mentioned, insurance, finance and banking, health care…travel.
Travel is going to be an enormous industry. It is already big. As people get more affluent, they are going to travel. We think the experience of our operators in bringing Chinese tourists to Europe would be of benefit to the Chinese consumer. We have information that is not available in China.
I also mentioned the limitations of ownership. We believe that that over time, limitations should be lowered and eventually disappear.
On rules and regulations, a lot can be done to improve consistency. While we are seeing enormous efforts in rules and regulations, application, how they are enforced, is still problematic. Across geography for instance, some provinces do it x way, some provinces do it y, and for a company, it is very difficult to adapt to that.
