Remarks by Angel Gurría
Beijing, China - 25 March 2018
(As prepared for delivery)
Minister Xiao Jie, Distinguished Guests, Ladies and Gentlemen:
It is my pleasure to be in Beijing for the 2018 China Development Forum, addressing this session on “China’s Fiscal and Tax Reform – A Global Perspective”. Thank you for your warm welcome. I would like to thank Lu Mai and the China Development Research Foundation for their invitation, and our good friend Li Wei for his hospitality and support over all these years.
The key issues being addressed at this year’s CDF – securing high-quality development; implementing fiscal, tax, and supply-side structural reforms; and developing better financial policies – lie at the heart of the OECD’s agenda. We know these issues can’t be tackled in isolation. Global solutions and concerted efforts are necessary, particularly if we are to address challenges such as the root causes of the backlash against globalisation.
China is leading efforts to strengthen the global tax system…
On tax policy, China has been a true global player. It has been an active participant in the OECD-G20 Base Erosion and Profit-Shifting (BEPS) Project, initially as a member of the CFA Bureau Plus in the first phase, and now in the Steering Group of the Inclusive Framework on BEPS.
China is a longstanding member of the OECD’s Global Forum on Transparency and its Steering Group. Through these fora, China is helping to strengthen the global tax architecture and to avoid the risk of unilateral actions that undermine tax transparency and facilitate tax avoidance. In the G20 context, China is helping to bring forward the OECD’s work on tax certainty as well as to shape solutions to emerging problems, such as the tax challenges presented by the rapid digitalisation of the economy.
… and has implemented ambitious domestic tax reform
China is leading by example. The progress in rapidly reforming China’s indirect tax system from a mix of complex, inefficient and distortive taxes, to a modern, broad-based VAT that adheres to OECD standards has been, quite simply, remarkable. The VAT reforms are a core element of China’s broader efforts to pivot growth away from heavy industry towards more innovation and technology-driven economic activities, particularly in the services sector, and to stimulate domestic consumption. They have been complemented by tremendous improvements in streamlining VAT administration and in implementing state-of-the-art taxpayer services at central and local levels.
At the request of Mr. Wang Jun, Commissioner of the State Administration of Taxation, the OECD conducted an in depth review of the VAT reforms — based on the OECD VAT/GST Guidelines — and found that they have been instrumental in supporting economic activity, boosting growth, and strengthening China’s international competitiveness, particularly in the services sector. And they have benefited more than 25 million Chinese taxpayers!
China has recently announced a wave of new tax reforms, touching on corporate income tax, personal income tax, and further improvements to the VAT system. As the world’s largest economy in terms of PPP, China’s reforms will be followed with great interest by the global tax policy community.
More efforts are needed to strengthen fiscal policy
Turning to fiscal policy, China is stepping up. In recent years, it has undertaken more fiscal reforms than the past quarter of a century. But much more needs to be done. Let me focus on four areas:
First, removing implicit guarantees. The Budget Law revision in 2014 paved the way for legal borrowing at the local government level, thereby enhancing transparency and sustainability. However, as long as there are implicit guarantees to public entities, and as long as local governments are burdened by unfunded mandates, there will always be incentives to raise illegal debt. Therefore, to reduce fiscal risk and ensure sustainability in the long term, implicit guarantees need to be removed and fiscal relations better balanced.
Second, rebalancing public investment. Public investment has been rapidly increasing in recent years thanks to generous interest subsidies and quasi-fiscal spending through ‘policy’ banks, but China needs to be careful about the misallocation of capital. While the physical capital stock still needs to be built up, spending pressures related to ageing, the extension of the social safety net and the provision of public services call for more emphasis on soft investment.
Third, using fiscal levels to step up the fight against inequality. The gap between the richest and the poorest remains wide — the richest 1% hold one third of total wealth — while the tax and transfer system has little redistributive impact. In the 2017 Economic Survey of China we recommended implementing a broad-based nationwide recurrent tax on immovable property and an inheritance tax that would include some basic inheritance allowance.
Last but not least, better targeting fiscal incentives. A few months ago, Minister Xiao Jie sought the OECD’s support in helping China identify structural impediments to its manufacturing competitiveness and further upgrading along the global value chain. One of the effective policy responses we found concerns the use of fiscal incentives, as appropriate tax arrangements may help stimulate business investment, innovation and growth. Nevertheless, it is equally important to note that all fiscal incentives, whether direct or indirect, should be used soundly to avoid wasting public resources or leading to a potentially dangerous global fiscal race to the bottom.
Ladies and Gentlemen:
The OECD is proud to count China as one of its Key Partners. Over the past 20 years, we have built an impressive level of mutually beneficial collaboration. In this spirit, the OECD stands ready to support China as it continues to implement the tax and fiscal reforms necessary to modernise its economy and design, develop and deliver better policies for better lives.