A group of foreign-funded banks in China has already put forward an application, hoping that China’s government can postpone imposing income tax on the overseas loan interests of the foreign-funded banks in China. It is said that such a policy will aggravate the influence of financial crisis on those banks.

36 foreign-funded banks signed on to a ferociously-worded letter to the Chinese government, arguing that the tax on overseas loan interests puts an excessive burden on foreign-funded banks in China. The tax would be imposed retroactively from January 1, 2008. Citibank is apparently the ringleader.

Though domestic-funded banks, like foreign-funded banks, would pay the tax, they usually have a large amount of deposits, which make them less dependent on overseas loans than the foreign-funded banks.

According to Guo Tianyong, director of the China Banking Research Center, Central University of Finance and Economics, the interest ratio in China is higher than it is in most other countries. The cost of getting capital is therefore lower for foreign-funded banks than it is for their domestically-funded enemies. China’s foreign-funded banks get the majority of their capital from overseas. If no overseas tax is imposed, it is obviously unfair for China’s domestic-funded banks. Meanwhile, an increase of the overseas loans would result in an increase of China’s foreign debt as well as fluctuation of questionable severity in China’s foreign reserve.

At the same time, Guo Tianyong made clear that China’s government would make an integrated consideration of that matter in all respects because the financial crisis has caused more trouble for the foreign-funded banks than the domestic-funded ones.

On December 12, 2008, the State Administration of Taxation (SAT) issued a notice on its website, saying that the overseas institutions must pay income tax on loans interests from banks in China. Strangely, the inscription date of this note is set to November 24, 2008.

The SAT declared that the banks in China borrowing overseas loans must withhold and remit the income tax of the overseas loan interests.

According to the current income tax system in Mainland China, this kind of income tax is set at 10%. However, some Hong Kong-based banks which have signed the taxation agreement with Mainland China can pay this kind of tax at the ratio of 7%.

Banks supporting and signing on this application letter include HSBC Holding Plc, Standard Chartered Bank the Bank of East Asia’s subsidiary company in Mainland China

Ernest and Young (E&Y) wrote the introduction letter of this application, which shows that the income tax on the overseas loan interests and the recent adjustment of the banks’ business tax will cause 1 billion yuan (USD 146.2 million) in extra taxation.

This letter from E&Y to the SAT says that this is related with whether a dependant bank can survive this financial crisis.

Insiders said E&Y was playing a leading role in this insolence.

The letter also said that the tax may weaken the financial connection and fluidity between Mainland China and Hong Kong, since Hong Kong is the main financing source for the banks in Mainland China.

This tax first got passed in 1997. But foreign-funded banks managed to talk their way out of paying it. But things done changed, maybe.

The new Enterprise Tax Law taking effect in January 1, 2008 included this tax once again. The domestic-funded companies were also required to pay that income tax.

At first people generally thought that the exemption policy in 1997 could be still applicable. But such a policy just delayed the imposition of this tax, not exempted it forever.

In the application letter, the foreign banks ask China’s government to impose the income tax on the overseas loan interests coming out after December 4, 2008 during the period of examination and discussion for the application letter. They also require the government not to impose the income tax on the overseas loan interests coming out before December 4, 2008 temporarily.