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Home >> News Brief

IMF moots tax neutrality ahead of amendment to Chinese bankruptcy law
By TII News Service
Aug 28, 2019 , Washington DC

THE International Monetary Fund recently released a research paper calling for tax neutral treatment in China's Enterprise Bankruptcy Law (EBL). Enacted in 2007, EBL is expected to be amended with the Government forming a committee in June 2019 to draft the amendments to EBL. The Paper is titled Selected Issues paper on the People’s Republic of China and urged that a tax neutral treatment for insolvency and debt restructuring in the law would contribute to a more efficient restructuring process.

It also mentions that along with reforming the law, enhancing the capacity of the judiciary to handle insolvency cases is needed. An effective application of the amended law will also help prevent unwarranted interventions in bankruptcy proceedings that could prevent the start of eligible cases. As per the paper, released on August 23, 2019, EBL generally follows best international practices but is “very concise with many gaps, leaving it subject to uneven interpretation and implementation”. As a result, EBL does not provide adequate guidelines for many complex problems in insolvency, a growing problem given China’s deadline to resolve “zombies” by 2020. Hence the paper suggests that the amendments to law should focus on providing greater clarity and details on the scope of the law’s application; the conditions for bankruptcy and bankruptcy procedures.

The paper focused on China’s shrinking current account surplus due to multiple reasons. It noted that China’s current account surplus has declined significantly from its peak in 2008. While part of the sharp decline in 2018 is cyclical, the trend over the past decade is largely structural, driven by a widening of the services deficit and a moderation of the surplus in goods trade. Even at the bilateral level, the trend has been towards a greater balance, with declining goods trade surpluses with the US and the EU; and declining deficits with Japan, Korea and Taiwan, Province of China. With China’s growth model moving from exports towards consumption, the trend toward a smaller surplus or even a small deficit is likely to stay, with far reaching implications for China and the rest of the world, it adds.

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