Unified China tax to hit SAR firms

PUBLISHED : Wednesday, 05 June, 2002, 12:00am
UPDATED : Wednesday, 05 June, 2002, 12:00am

Thousands of Hong Kong enterprises operating low-end manufacturing businesses in the mainland face higher taxes when Beijing unifies domestic and foreign corporate tax rates next year.

Manufacturers, particularly those in the mainland's five special economic zones, enjoy low tax rates and a range of incentives. However, under the new regime, they can expect to pay higher rates and lose certain tax incentives, according to tax experts with international accounting firms.

The mainland Economic Daily yesterday quoted Finance Minister Xiang Huaicheng as saying foreign corporate income tax and domestic corporate income tax will be unified next year. It is the first time a senior central government official has specified a timetable for the introduction of a new tax regime.

A spokesman at the Ministry of Finance declined to comment on the newspaper report.

The move to standardise the corporate tax rate is part of a wider reform of the taxation system following the mainland's accession to the World Trade Organisation.

The Economic Daily did not say what the proposed unified tax rate would be but tax experts said they expected it to be 24 to 25 per cent.

Foreign-invested companies in the Shenzhen, Xiamen, Shantou, Zhuhai and Hainan special economic zones pay a 15 per cent corporate tax rate. Outside the economic zones, they pay between 24 and 27 per cent. Domestic companies pay a statutory tax rate of 33 per cent.

'Following the unified tax rate, more restrictions on tax breaks will be applied under the new tax regime,' Ernst & Young partner Ivan Chan said.

Mr Chan believed Beijing would continue to offer preferential tax incentives for favoured industries such as the high-technology sector.

However, industries such as traditional manufacturing that did not require a high level of technological support were unlikely to be granted tax breaks under the new regime, Mr Chan said.

It had been speculated that foreign-invested companies operating in the special economic zones, together with a new one in Shanghai's Pudong would continue to enjoy tax holidays but it was not confirmed by mainland authorities, Mr Chan said.

Tax experts said that local governments were believed to provide incentives to foreign investors who played an important role in their economic development.

Small companies engaged in low-end manufacturing and located outside special economic zones will be hit hardest under the new tax regime, they said.