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China will no longer be a cheap-labour country

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Things don’t always move quickly in China, but once a change has been announced, it can be off to a flying start. Take for example the social insurance scheme. From the 1st of January, new and reformed regulations regarding the contributions, as well as national and local taxes, will take effect. This was decided last July, and the regulations will come into force the coming year.

Social insurance schemes form an important part of the tax legislation. So far, the contributions have always been collected by the local social insurance agencies in China. But this is going to change. The local tax office is going to take over this responsibility. That means that in the future, the income tax and social insurance contributions will be collected by the same people.

This change is going to have a huge impact on businesses. The tax office will now be able to see immediately whether contributions are paid on the entire income. Up until now, the taxation authorities and social insurance agencies have always been working independently from each other. There’s no collaboration; they have completely different systems and they don’t share any information whatsoever. You don’t need a degree to understand the consequences of this situation. Many companies are paying contributions on salaries that are much lower than the employees are actually earning. If they’re paying at all.

It isn’t hard to guess the objective of the reform: to put an end to the current practices. Now that the taxation authorities are going to collect both the income tax and the social insurance contributions, they’ll know exactly how much is owed. If the taxable income doesn’t correspond with the salary that was entered for social insurance, they’ll take action immediately. Get ready for fines and retroactive assessments!

Many companies will be facing much higher salary costs than what they were used to, and what their pricing was based on. That’s where the circle begins. China is no longer going to be the cheap-labour country it used to be. Companies will no longer be able to produce competitively and as a result, they will go bankrupt or relocate to a different (cheap-labour) country. Both scenarios will lead to an increase in unemployment. This, in its turn, will moderate the increase in salary costs for companies and make them more competitive again.

All in all, the reform is probably not a bad thing. It contributes to a healthy competition and just like with many other things: there are two sides to it. For some companies it might mean the end, while others could end up benefiting from it.

Cok Harteveld,

General manager Van den Berg Roses China

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