Proposed tax law levels playing field

PUBLISHED : Friday, 22 December, 2006, 12:00am
UPDATED : Friday, 22 December, 2006, 12:00am

Legislation to standardise rate for foreign and domestic firms

Lawmakers will soon deliberate long-expected legislation that would unify the corporate income tax rate for foreign and domestic companies at 25 per cent, a mainland newspaper said yesterday.

The Standing Committee of the National People's Congress, the legislature, will review the proposed law at a session beginning on Sunday, the 21st Century Business Herald reported. The legislation includes a five-year grace period for 'old' foreign companies, it said.

The law, if approved, would give most foreign companies a higher tax bill while reducing the rate for domestic firms.

Analysts have forecast the proposed change would cut into fiscal revenue and make the mainland a less attractive place for foreign companies to invest.

Foreign-invested companies in development zones typically pay 15 per cent corporate income tax, while foreign firms engaged in manufacturing in other areas pay 24 per cent - not including a 3 per cent local enterprise tax, which is often waived by local governments.

Most domestic companies pay 33 per cent, although those with lower profits pay 18 per cent or 27 per cent.

The bill could get a second reading at another meeting of the standing committee in February, clearing the way for it to be presented at the annual session of the full congress in March, the newspaper said. Legislation usually requires three readings before final approval.

Experts were quoted as saying that the law could take effect as early as January 1, 2008.

Tax industry officials said the 25 per cent rate and the grace period were well-known proposals as the draft had been under discussion for three years.

The new law would allow companies with lower profits to enjoy a tax rate of 20 per cent.

Some foreign companies considering investment are rushing to register before possible approval of the law in March, although the cut-off date to enjoy the five-year grace period is not known.

'The reality is, whether they like it or not, foreign companies will have to accept higher tax,' said an official at a prominent accounting company.

In an annual policy paper, the European Union Chamber of Commerce in China had called for the grandfather clause.

'A transparent and smooth transition will be required especially for [foreign-invested enterprises] to adjust to the new law,' it said.

The proposed law would also scrap a policy that allows a two-year exemption and three years of half tax for new foreign manufacturing companies once they become profitable, the newspaper said.

Officials have played down the potential impact on foreign investment, saying the new rate will simply level the playing field following the nation's entry to the World Trade Organisation five years ago.

The 21st Century Business Herald estimated the change could mean a loss of at least 93 billion yuan in tax revenue, but it claimed the impact on total fiscal revenue would be manageable.