The new corporate income tax law will affect foreign manufacturers and new businesses setting up on the mainland, but will prove a boon to foreign retailers and service providers, says an expert who advises companies on investing in China.
'Services will benefit from the law, but the new rate means that some manufacturers will not expand while others will decide not to establish businesses here,' said Lester Ross, managing partner in Beijing for US law firm WilmerHale.
Although the official corporate tax rate for both domestic and foreign companies is set at 33 per cent, foreign manufacturers benefit from preferential tax breaks that typically reduce their tax liability to 15 per cent. Foreign service providers, in contrast, usually pay the full amount.
The new unified rate of 25 per cent would therefore benefit both domestic companies and foreign service providers, such as retailers and financial services firms, but would prove expensive for manufacturers, Mr Ross said.
Enterprises that register before the new law is implemented - expected to be next year - will continue under the old system for an unspecified 'transition' period, while new entrants will have to pay the full 25 per cent.
'There will be a rush of manufacturers trying to get approved before the new law is implemented,' Mr Ross added.
JPMorgan estimated in a research report that state-owned companies would be the largest beneficiaries of the tax reform, as they are entitled to the least tax exemptions and reductions at present. It said the companies to suffer the most would be foreign companies with a majority of their production facilities on the mainland and mainland firms with a majority of their profits from joint-venture subsidiaries.
