U.S. and China Corporate Tax Implications for Pillar 2 Adoption

With globalization and international competition, governments’ corporate tax policies have increasingly become a focus area because of their potential to affect a country’s competitiveness in the global marketplace.

The United States has one of the highest effective tax rates in the world, as well as the world’s largest economy. As the world’s second-largest economy, China also attracts significant attention from global multinational enterprises.

This article summarizes the tax burdens and governmental incentives for U.S. and Chinese corporations to look at the competition between the world’s two largest economies. It identifies key differences in their corporate income tax structures and the implications for U.S. and Chinese economic and political goals. For example, high U.S. corporate tax rates may discourage foreign direct investment (FDI), while China’s preferential rates for specific sectors may lead to uneven economic development.

This article provides insight into how tax policies affect the financial performance of China and the United States, shedding light on government policymaking decisions. While tax reform is constantly being discussed in the United States, including efforts in both the executive and legislative branches, China has been implementing a renewed set of corporate tax policies and new, more efficient tax systems to retain and attract FDI. Corporate income tax incentives play a pivotal role in shaping the economic landscape of the United States and China.

They influence corporate behavior, investment decisions, and overall economic growth. In the United States, tax reforms have been designed to stimulate innovation and attract FDI.

For example, reducing corporate tax rates is a way to improve the investment environment’s attractiveness, encouraging firms to invest in research and development and to make capital expenditures. 1 This aligns with findings 04/12/24, 17:40 U.S. and China Corporate Tax Implications for Pillar 2 Adoption | Tax Notes

that tax incentives can affect corporate financial performance and innovation, demonstrating the practical implications of tax policies. 2 The Chinese government has also implemented tax incentives, mainly targeting high-tech enterprises and FDI.

Revisions made to the Enterprise Income Tax Law in 2017 allowed for the carryforward of corporate donations, which has been shown to positively influence corporate behavior. 3 Also, tax incentives in China are often linked to broader industrial policies that foster innovation and economic growth.

For example, R&D-related tax cuts have catalyzed innovation, and the potential for future tax benefits has created incentives for further technological advancement.