Tax breaks at risk as single rate looms
Mainland officials still undecided on a proposed five-year transition period for foreign-invested firms
China's move to unify the corporate income tax rate may spell the immediate end of tax holidays offered by most, if not all, economic zones, experts said yesterday.
It was being debated whether foreign-invested firms would continue to enjoy tax holidays during a proposed five-year transition period and whether a similar 'grandfathering' period would apply to companies - domestic or foreign - operating in various types of economic zones, they added.
The government plans to submit a draft bill on a unified corporate income tax rate of between 25 per cent and 27 per cent to the standing committee of the National People's Congress by August after a State Council go-ahead.
After repeated delays, it is expected the bill could be approved by the annual meeting of the NPC in March next year and take effect at the beginning of 2008, according to Alfred Shum, Ernst & Young's Shanghai-based China executive partner.
KPMG tax partner Peter Kung expects the corporate rate to be unified and cut to 25 per cent, 'so that on paper, the tax is not that punitive' and makes enforcement easier.
China has long maintained a multi-tier corporate income rate.
While the government theoretically levies a standard 33 per cent income tax on domestic firms in most of the country, foreign-invested manufacturers enjoy two years' exemption and three years of halved income tax as part of a policy to lure foreign investment.
Central government-designated special economic zones such as Shenzhen and Xiamen, as well as smaller local economic development and technology zones, also offer special tax rates to some domestic or foreign-funded companies to attract investment.
Company tax is capped at 15 per cent in Shenzhen and 24 per cent in Guangzhou. Domestic firms outside such zones often strike bargains with government for lower rates.
China committed to unifying the corporate income tax rate to create a level playing field for domestic and foreign companies after it joined the World Trade Organisation in December 2001.
The government has repeatedly said future corporate concessions will be used to boost development in economically lagging regions, such as inland areas and to foster in high-technology and environmentally friendly sectors.
Although corporate income tax contributes just over 15 per cent of China's three trillion yuan annual tax revenue, the final passage of the bill to unify the tax rate and its implementation have been repeatedly pushed back as various vested interests wrangle over the final terms.
The Ministry of Finance and the State Administration of Taxation are understood to be pushing for a unified rate, while the Ministry of Commerce is arguing it would slow foreign direct investment.
'One school of thought is, if you allow certain companies in China to enjoy these benefits, then how can the newcomers compete with them?' Mr Kung said.
Local governments, which often used the amount of foreign direct investment as a yardstick of political achievements, had also voiced concern, Mr Shum said.
China might end up applying a five-year transition period to firms operating in only a few of the country's largest special economic zones, such as Shenzhen, Xiamen and Shekou, he said.
