Corporate tax merger bound for NPC at last

PUBLISHED : Tuesday, 06 June, 2006, 12:00am
UPDATED : Tuesday, 06 June, 2006, 12:00am

Legislation to bring parity on local and foreign rates could be in force by 2008

A new draft of a law unifying income tax rates for local and foreign companies will be tabled for a first reading by the National People's Congress Standing Committee in August and could be approved as early as March, according to finance and taxation officials.

Wang Jianfan , a vice-director of the Ministry of Finance's taxation department, said the law was expected to come into effect at the start of 2008, the official China Securities Journal reported yesterday.

Foreign firms, and those from Hong Kong, Macau and Taiwan, pay an average of 15 per cent in corporate income tax, compared with 33 per cent for domestic firms.

Sun Ruibiao , director of income tax at the State Administration of Taxation, was also quoted as saying the legislative process could be completed before the end of the year.

Domestic firms have long argued for equal taxation, while foreign companies maintain that their domestic rivals are able to obtain preferential loans and other special treatment.

Disputes among government departments forced the last-minute withdrawal of the long-awaited law this March, when it was due to be reviewed at the NPC's annual meeting.

Analysts were divided over the law's potential impact on foreign investment.

'The merger will certainly have some negative impact on the attraction of foreign investment in China,' said Zeng Junping , a tax expert and president of public finance at Shanghai University of Finance and Economics.

But Eddies Chen, chief of the China mission at Invest in Sweden, the Swedish government investment promotion agency, said he could not see any serious negative impact.

'It would have had a serious negative impact on foreign investment in China if Beijing had scrapped its preferential tax treatment 15 to 20 years ago when the investment environment was very poor and foreign firms were struggling to survive,' Mr Chen said.

Mr Chen, also chief China investment consultant to the Swedish government, said the mainland was attracting foreign investors because of the size of its market, its reasonable labour and resources costs, and strong infrastructure.

Professor Zeng said tax parity was a condition for the country's admission to the World Trade Organisation in 2001. From 1994, China began to levy a 33 per cent tax rate on both local and foreign companies, but investment incentives can cut a foreign firm's tax rate to 15 per cent or less.

'The merger is a significant step towards a free-market economy,' Professor Zeng said.

He said the different interests of government departments were behind delays in the draft.

Finance Minister Jin Renqing and the director-general of the State Administration of Taxation, Xie Xuren , have repeatedly spoken of the urgent need to unify tax rates.

But officials from the Ministry of Commerce and the National Reform and Development Commission said higher tax rates for foreign-funded companies would have a negative impact on the growth of direct foreign investment, which fell last year.

The China Securities Journal did not disclose a proposed rate.