China's banking sector will be the biggest beneficiary of proposed tax reforms expected to take effect January, 2008, say analysts, when a uniform corporate income tax rate will be levied on both domestic and foreign corporations.
The reforms will be reviewed by the country's top legislature in early March.
If passed, the new tax policy will change current dual-track corporate tax rates - 33 percent for domestic companies and 15 percent for foreign-invested enterprises - to a unified 25 percent.
"For Chinese companies, it is obvious that less tax means more profit," said She Minhua, a banking analyst from CITIC China Securities.
The Industrial and Commercial Bank of China (ICBC) had a 2005 pre-provision profit of 78 billion yuan. With an 8 percent tax reduction, it would have gained 6 billion yuan in net profits.
Chinese banks will see more dividends than solely the tax cut, as most do not currently benefit through write offs and pay an actual tax rate higher than 33 percent due to non-deductible expenses.
"A bank will see a 1 to 1.5 percent profit gain from a 1 percent income tax cut," She said.
"There will be a profit increase of at least 8 to 12 percent for domestic banks when the new policy is implemented next year."
Market analysts share similar views on banks' profit growth.
Cao Haiyi, analyst from Hunan-based Fortune Securities, estimated that harmonizing the tax code will bring a 12 to 14 percent increase in net profit to each bank.
Investment bank UBS said in a research report that if other factors remain unchanged profitability of domestic banks will grow by 6 percent in 2008.
Deutsche Bank predicted Chinese banks will see a 3 to 15 percent increase in profit from the tax cut.
ICBC and China Construction Bank (CCB), with the biggest State corporate client base, will benefit most, the investment bank said.
"By accelerating their earnings growth and offering a fair playing field for all businesses, the tax cut will help improve the competitiveness of domestic banks," said Gao Yuan, analyst from Guangda Securities.
Chinese banks face increasingly tough competition from their foreign counterparts after the country fully opened its banking market last December.
In addition to the direct tax cut, another measure in the proposed tax reform package may benefit local banks as well.
The new policy may allow domestic companies to list all wages as costs, as their foreign counterparts do at present, instead of listing wages as pre-tax deductible items.
Most Chinese companies can currently deduct only 1,600 yuan monthly for each em ployee in their tax base, meaning they pay corporate taxes on employee wages above the 1,600 yuan threshold.
And the threshold was just doubled from 800 yuan in July, 2006.
"The pre-tax deduction of all wages is important for banks as they have a large number of employees and have big expenses on wages," She from CITIC China Securities said.
The non-overseas-listed banks will benefit from the wider pre-tax deduction.
CCB and Bank of Communications, which listed in Hong Kong in 2005, have already enjoyed preferential treatment.
It is reported that Bank of China and the ICBC have won approval from the State Administration of Taxation to raise their wage-deduction threshold.
When deducting all wages before taxation, domestically listed banks will have an average 4 percent increase in net profit, said Tian Hui, analyst from Bohai Securities.
(China Daily January 30, 2007)