Mainland businesses welcome new tax law

PUBLISHED : Friday, 09 March, 2007, 12:00am
UPDATED : Friday, 09 March, 2007, 12:00am

But local officials say end to preferential rates will spook foreign investors

The proposed corporate income law unveiled by Finance Minister Jin Renqing to National People's Congress delegates yesterday was welcomed by those from business backgrounds for putting domestic and overseas companies on an equal footing.

But the proposed legislation still concerns jittery local officials, worried that their regions might lose their appeal to many foreign investors.

The bill seeks to unify the rate of income tax paid by foreign and domestic firms at 25 per cent. If passed, it will end a decades-old practice aimed at attracting foreign investment that makes domestic firms pay 33 per cent income tax while their foreign counterparts are subject to an average 15 per cent.

The law was in response to long-standing calls from domestic companies for 'fair competition' and was aimed at increasing support through tax breaks to hi-tech, environmental protection and energy-saving companies, Mr Jin said.

'China's economy has been growing rapidly. Company profits have been rising substantially, and fiscal revenue has maintained a good rate of increase. The timing for the reform is good when the country and enterprises have a strong capacity to handle its impact,' he said.

The legislation is scheduled to come into effect next year and, once that happens, China's tax revenue is expected to decrease by 93 billion yuan, with a projected 134 billion yuan drop off from domestic companies and a 41 billion yuan increase from their foreign counterparts, said Mr Jin.

The central government takes 60 per cent of the country's corporate income tax, while the remaining 40 per cent goes to local governments.

Local officials at the session evaded the question of whether there was any reason to worry about a drop in local revenue, expressing their support for the unification.

Analysts have widely forecast that coal companies in Shanxi will be a major beneficiary of the lower tax rate, but the province's governor, Yu Youjun , said: 'I believe the law will not have an impact on Shanxi's business.'

Hainan party secretary Wei Liucheng expressed concern about possible discontent among foreign investors in economic zones.

'There must be an impact. So many foreign enterprises have invested in economic zones and were attracted by preferential policies, including the tax break. Now big changes are going to take place and the appeal is fading,' Mr Wei said.

Currently, foreign companies in economic zones enjoy a 15 per cent or lower income tax rate. The proposed law grants a grace period to companies in the zones, but does not specify its length.

Sichuan New Hope Agribusiness chairman Liu Yonghao welcomed the level playing field, saying it should have come earlier.

Hong Kong-based Chuang's Consortium International chairman Alan Chuang Shaw-swee admitted there would be an impact on foreign business on the mainland but advocated the move.