Shanghai and the central government are debating a policy change which would eliminate the favourable tax rate for foreign companies in the Pudong district - potentially making the city a less attractive place to invest. The change, if enacted, would be another sign that Shanghai's favoured position has weakened since former president Jiang Zemin, who is from the city, left office more than three years ago. Shanghai is currently under attack for a scandal over the mismanagement of its pension fund and its handling of measures to slow property speculation. For years, Shanghai offered the tax break to attract foreign companies as it sought to turn Pudong into the nation's financial and commercial centre, with the support of the central government, government and tax sources said. Foreign companies in Pudong pay 15 per cent tax. Firms elsewhere in the city pay 27 per cent or 33 per cent. The discussion on whether to tax Pudong firms at the same level as the rest of the city has gone on for years. However, with the mainland planning to 'unify' the corporate tax rate for foreign and domestic companies as early as 2008, the debate has taken on new urgency. Most domestic companies pay income tax of 33 per cent, higher than many foreign companies. The reform would set a new rate for all firms, most likely of about 25 per cent, tax analysts say. Shanghai would like to preserve the special treatment for Pudong, either by maintaining a corporate income tax level below the new rate or implementing a 'grandfather clause' which would preserve the current rates for a period of time, such as five or 10 years. Another possibility would be to make Pudong a special economic zone (SEZ) like Shenzhen to preserve the current tax rate - if the SEZs are allowed to retain preferential tax rates. However, such a change could further strengthen the relationship between Pudong and the central government at the expense of Shanghai. Pudong already shares tax revenue directly with the central government, unlike other city districts. A spokesman for the Pudong district government denied knowledge of any possible change. An official of the district's investment department said the decision lay with the central government. Many foreign companies are already looking outside Shanghai, driven away by high land and labour costs. By the end of last year, Shanghai had attracted cumulative foreign direct investment of nearly US$60 billion, and another US$100 billion in contracted investment, official figures show. But the pace of growth in investment has been slowing. Pudong accounts for a quarter of the city's economic activity, a third of its foreign investment and half of its trade.