12/07/2011 02:35 EST | Updated 02/05/2012 05:12 EST

Foreign companies, employees in China squeezed by pension, tax changes

BEIJING, China - Foreign companies that are looking to China to shore up wilting global sales have been hit by higher payroll taxes, surcharges to subsidize unions and other changes that are making conditions tougher just as economic growth slows.

The biggest worry for many is an abrupt order for foreign workers and their employers to start paying up to 40 per cent of their wages for pensions and other welfare. Automakers face a possible tax hike, while tax authorities are testing a system to collect dues for China's umbrella labour group from companies without union workers.

The changes come against a backdrop of critical coverage by state media of product safety and other complaints against high-profile corporations such as Wal-Mart Stores Inc. and energy giant ConocoPhillips Co. Companies also are uneasily awaiting the release of new patent and copyright rules they worry might push them to hand over technology.

The pension and medical charges took effect Oct. 15, less than six months after they were announced. Companies scrambled to come up with the money while employees wonder whether they will ever be able to collect the benefits.

The cost "may make the difference for some companies between a profitable year and an unprofitable year," said Adam Dunnett, deputy managing director of the Beijing office of consulting firm APCO Worldwide.

The changes have prompted questions about whether Beijing's attitude toward foreign companies that invested $105 billion in China last year and employ nearly 10 million Chinese workers is souring.

The communist government needs their investment and skills to develop its computer, auto, energy, telecoms and other industries but sees them as rivals to Chinese companies it wants to build into global competitors.

"China's enthusiasm for foreign companies is certainly waning," said James Zimmerman, a partner in Beijing with the law firm Sheppard Mullin Richter & Hampton who has worked in China for 14 years. "The government has become more selective in the types of investments permitted market access and more critical of those investors that are either out of favour or perceived as troublemakers."

Those hit hardest by the social charges will be consulting firms, international schools for foreign children and others with big foreign staffs that account for up to 70 per cent of their costs. The impact on manufacturers should be limited because foreign employees are a small share of their workforces.

"This year we are probably going to just have to absorb it, which will probably cause us to show a loss," said Tim McDonald, headmaster of the International Academy of Beijing, which has 260 students and 45 foreign employees.

Foreign companies are on edge about patent and copyright rules due to be released soon under an anti-monopoly law enacted in 2008. A vague section of the law forbids abuse of intellectual property to hamper competition and companies worry it might be used to compel them to give know-how to Chinese rivals.

It is unclear whether the changes are related but they come at a complex time for the communist leadership both financially and politically.

Beijing needs to raise revenue to fulfil promises to improve schools and health care for China's poor majority. That comes as Communist Party factions wrangle over next year's handover of power to younger leaders