Boost for corporate tax-rate merger

PUBLISHED : Thursday, 23 December, 2004, 12:00am
UPDATED : Thursday, 23 December, 2004, 12:00am

Unified levy supported for domestic and foreign banks

The Ministry of Finance has pledged support for the merger of the two-tier corporate tax system for domestic and foreign financial institutions, mainland media reports say.

Quoting an official from the ministry's National Treasury Department, a report posted on the website of the official Economic Daily said this was the first time the ministry had responded to widespread calls from the domestic business sector urging a unified tax regime.

The Economic Daily is an affiliate of the State Council, the mainland cabinet. It also quoted another official from the ministry's Taxation Department as saying the merger was being discussed and a final blueprint had not yet been drawn up.

Beijing first revealed last year it planned to reform the corporate tax system, merging the two-tier corporate tax regime into a single rate. The government currently levies a 15 per cent tax rate on most foreign-invested enterprises and a 33 per cent rate on domestic firms.

Pushing through the proposal is proving difficult, however. Recent reports suggested the unified rate, expected to be about 25 per cent to 28 per cent, would appear by 2006.

The ministry plays a pivotal role in deciding state revenue and public spending measures, and its public support may signal a gathering of momentum for the change as far as the financial sector is concerned.

At a meeting attended by officials from the People's Bank of China, the Ministry of Finance and other domestic financial institutions in Beijing last week, the wide tax gap between local and foreign-invested financial institutions was criticised as unfair competition, according to the report.

The scrapping of the two-tier tax regime for foreign-invested and local banking and financial firms has become more imperative as the mainland prepares to fully open up the sector to foreign investment in 2006 under its WTO commitments.

One of the consequences of the mainland's entry into the World Trade Organisation is that the central government will implement policies applying to all firms.

However, the government will continue to provide incentives for investment in its western hinterland. Proposals for tax incentives for investment in high technology and environmental protection are also under discussion.

Analysts have warned that the abolition of the two-tier tax regime would hurt direct foreign investment. FDI has continued to soar this year, reaching US$53.8 billion in the first 10 months of this year, surpassing last year's total.