Mainland plans unified tax regime for corporations
China plans unified tax for firms
The mainland is expected to unify its two-tiered corporate income tax regime for domestic and foreign-invested firms at a single rate of between 25 and 30 per cent, according to d sources.
A draft corporate income tax code that would fulfil China's commitment to equal treatment of domestic and foreign firms under World Trade Organisation rules is circulating among senior State Administration of Taxation officials.
Although the unified rate has yet to be finalised, 25 per cent, 27 per cent and 30 per cent have been floated in recent months.
'The final rate depends on many factors, such as the length of the transition period and what, if any, tax benefits should be preserved,' a mainland official said yesterday.
Most foreign firms pay corporate taxes of 24 per cent or less, thanks to a plethora of central and local government concessions aimed at attracting foreign investment.
Domestic companies pay a standard corporate income tax rate of 33 per cent. This is usually reduced through various benefits, but the effective rate is on average higher than that applied to foreign firms.
As with the 1994 reform of the value-added tax regime, the new corporate income tax bill is expected to contain a five-year grandfather clause allowing foreign enterprises to retain tax concessions during the transition period.
The new legislation would also eliminate the disparities between guidelines used by domestic and foreign firms to calculate deductibles, such as salary and depreciation expenses, said Danny Po, a China tax partner at PricewaterhouseCoopers.
A source said that officials had wanted to submit the draft bill to the State Council for approval at the end of this month.
The bill would then be presented to the Standing Committee of the National People's Congress for review, perhaps in time for approval by the full meeting of the national legislature in March next year.
Given the procedural hurdles, Mr Po estimates the bill could take effect in January 2006 at the earliest.
'When determining the unified tax rate, China will have to take into account rates in neighbouring countries and regions,' he said.
Companies pay a 17.5 per cent corporate income levy in Hong Kong, which is renowned for its low taxes. The rates have been about 22 per cent in Singapore, 28 per cent in Malaysia and 30 per cent in Thailand in recent years, according to PwC.
'The financial burdens on companies - particularly foreign-invested firms - and the government will also be considered,' Mr Po said.
China last year collected 304.1 billion yuan in corporate income taxes, almost 15 per cent of its total tax receipts, from domestic and foreign enterprises operating in the country, according to the State Administration of Taxation.
'Setting a tax rate is only part of the reform,' Mr Po said. 'Another challenge is to decide what to do with the multitude of existing tax benefits.'
With the removal of tax breaks based on a firm's nationality, China plans to use incentives primarily to encourage development of certain industries and to stimulate growth in inland and northeastern provinces.
