Experts join in guessing game about unified corporate taxes
PREDICTING WHEN THE mainland government will implement measures to equalise corporate tax rates between domestic companies and foreign enterprises is like guessing the message inside a fortune cookie, says one Hong Kong tax expert.
Clement Yuen, a China tax and business advisory partner with Ernst & Young, said speculation about the changes in tax legislation had been rife for some time. However, the implementation date continued to be a moving target.
China plans to unify its tax code in line with pledges to meet the entry requirements of the World Trade Organisation. A growing number of domestic companies have been pressing for the change, saying the existing tax code gives overseas rivals a competitive edge.
The plan has met with strong opposition from some mainland departments, especially those involved in attracting companies to set up in China. They say a unified rate will dampen foreign investment growth, and they worry that China will become less competitive at a time when many Asian neighbours are working harder to attract overseas investors.
Under the proposed government plans, a unified tax rate of between 24 per cent and 28 per cent would be levied on both overseas companies and homegrown businesses. Overseas companies now pay about 20 per cent, while the domestic rate is 33 per cent.
Tax breaks for foreign companies, especially those in special economic zones or targeted areas for employment or technology, have helped make China one of the world's largest beneficiaries of overseas investment and fuelled the fastest growth among major economies. The mainland government has been offering overseas investors preferential tax rates since the mid-1980s.
Officials at the Ministry of Finance were reported as saying that a unified tax would be implemented next year. However, Mr Yuen said this was unlikely.
'At the moment we are not sure what is happening, but if the process follows the normal procedure for changing tax legislation, the proposal will be scrutinised by the State Council before it is passed on to the National People's Congress Standing Committee for reading, before being tabled before the National People's Congress.'
Mr Yuen said the National People's Congress would sit next March, and there might not be time to complete the procedures.
He said that if the new unified tax rate was approved, it might not come into force until 2007, or even the following year. Another possibility was to give a grace period to overseas firms with long-standing tax agreements.
'Whatever the outcome, we don't see any significant slowdown in enterprises willing to invest in China, although companies may change their position if and when the new tax laws come into play,' Mr Yuen said.
Ernst & Young tax partner Alfred Shum said that under the new scheme, both local and overseas companies would be free to select the most convenient options to establish production and distribution. The policies of local tax regimes would also be an important part of the planning.
He said the government was also likely to allow established foreign-invested enterprises some form of tax break for a limited time. It was also expected that local governments would be permitted to provide incentives for domestic and foreign firms to invest in China's economically developing regions, and in key sectors such as high technology.
