Tax breaks for foreign investors to stay

PUBLISHED : Wednesday, 13 July, 2005, 12:00am
UPDATED : Wednesday, 13 July, 2005, 12:00am

A senior Ministry of Commerce official has rejected mounting calls for domestic and foreign-invested businesses to be taxed at the same rate, saying preferential treatment to attract foreign investment will help sustain China's long-term economic growth.

Assistant Minister of Commerce Chen Jian said foreign-invested enterprises had been playing an increasing role in promoting the nation's economic development.

'We must continue to grant foreign-invested companies preferential treatment and maintain a long-term and stable policy towards the foreign-invested business sector,' Mr Chen said yesterday when asked to comment on plans to end preferential treatment for foreign-funded enterprises.

The nominal corporate income tax rate for domestic companies is 33 per cent, while that for foreign-funded companies is only 15 per cent. Unifying the tax rates has been on the central government's agenda for years, but heated debate among various departments last year prompted the withdrawal of a draft law prepared by the taxation authority and the launching of a new round of consultations.

Reports by the mainland media highlighted a rift between the ministries of commerce and finance, with officials expressing divergent views and recommending different timetables for unifying the rates.

As a senior official in charge of foreign investment, Mr Chen warned that without a preferential policy, the mainland might lose its ability to attract foreign investment.

He cited three reasons for supporting the continuation of the favourable treatment. First, the policy did not violate any World Trade Organisation rules. Second, China was still badly in need of foreign investment, which also brought with it technological and management skills. Third, preferential treatment was found in a number of other economies.

Mr Chen said the mainland could not just rely on its advantages of a huge market and cheap labour to lure foreign funds, given that it also had disadvantages - rising costs and a shortage of natural resources.

'Our neighbouring economies have granted ... much more preferential treatment to foreign-invested companies,' he told a news conference hosted by the State Council's Information Office.

Foreign-invested enterprises employed 24 million people last year - 10 per cent of the mainland's non-agricultural labour force.

The mainland topped the world as a destination for foreign direct investment (FDI), attracting US$60 billion last year.

Over the years, the mainland has received more than US$584 billion in FDI. By the end of May, the number of approved foreign-invested enterprises had reached 525,378, representing investment pledges of US$1.16 trillion.

Meanwhile, Mr Chen rejected the view that a fast-growing China was gobbling up the world's resources. He said that while China's economic growth had resulted in rising demand for resources, the government was pursuing a policy of relying on domestic sources to satisfy that demand.