China’s 2026 Government Work Report and draft budget mark the opening policy framework of the 15th Five-Year Plan, setting out a sweeping overhaul of the country’s fiscal and tax system. For businesses operating in China, the reforms signal a fundamental shift in how compliance, incentives and government relations are structured over the next five years.
Consumption tax reform reshapes local revenue
The most consequential change in the 2026 reform package is the restructuring of consumption tax. The Government Work Report calls for adjusting the scope and rates of consumption tax and shifting certain collection stages downstream, moving the tax base from production locations to consumption locations. This is expected to provide local governments with hundreds of billions of RMB in additional annual revenue, fundamentally altering their incentives from prioritising production-oriented investment to stimulating consumption environments.
For businesses, the implications are immediate and practical. Companies need to assess how these changes affect supply chain footprint, cross-regional compliance obligations and pricing strategies. Manufacturers based in regions that currently benefit from consumption tax collection may face particular pressure as the reform takes effect.
End of irregular local incentives
A parallel strand of reform targets the practice of local governments offering unofficial tax incentives to attract investment. The Government Work Report explicitly prohibits local authorities from unilaterally formulating tax or fiscal subsidy policies and introduces a negative list management mechanism for local fiscal subsidies. The intent is to dismantle regional tax competition and build a unified national market.
This marks a significant change for businesses that have historically structured operations around special local policy arrangements. Compliance is now the survival baseline, and tax planning strategies that relied on regional privileges are no longer sustainable.
Digitalised tax administration raises the compliance bar
With the PRC Value-Added Tax Law coming into force on 1 January 2026 and the universal rollout of fully electronic invoicing, China’s tax administration has moved decisively toward real-time, data-driven oversight. Business, cash and invoice data are now aggregated and analysed continuously, with anomalies triggering alerts automatically.
This shift from invoice-based control to data-driven taxation means reactive, after-the-fact compliance management is no longer viable. Finance and tax systems need to be integrated at the operational level, with compliance checks embedded into procurement, sales and reporting processes from the outset.
What the global minimum tax means for multinationals
China’s implementation of a domestic top-up tax under the OECD’s Pillar Two framework introduces a new layer of complexity for multinational headquarters. Preferential tax rates for high-tech enterprises that result in effective tax rates below 15% may trigger top-up liabilities, effectively reducing the benefit of those incentives.
At the same time, transfer pricing policies that treat Chinese entities as low-risk contract manufacturers or distributors may face greater scrutiny as Chinese operations take on more substantive R&D, supply chain and market development functions. Headquarters teams need to ensure that profit allocation reflects actual value creation, supported by documentation that aligns with the substance of Chinese entities’ contributions.
Targeted incentives reward strategic alignment
While irregular incentives are being phased out, fiscal resources are being redirected toward national strategic priorities. R&D superdeductions, accelerated depreciation and investment credits remain available, with support expected to tilt further toward basic research and core technology breakthroughs. Trade-in programmes for consumer goods and large-scale equipment renewal are also being actively supported through fiscal and financial instruments.
Businesses that align expansion plans with local industrial upgrading priorities, green economy, digital infrastructure and advanced manufacturing are better positioned to access these targeted incentives through formal channels. The shift rewards a proactive, partnership-oriented approach to government relations over transactional bargaining.
