The mainland's new income tax laws spell a heavy burden for some foreign invested enterprises (FIEs), but one tax analyst says the changes are not all bad. The new Enterprise Income Tax Law became effective on January1 after being passed by the National People's Congress in March last year. Under the old rules, with essentially two different tax regimes and rates of up to 33 per cent, FIEs averaged a rate of 14.89 per cent while domestic enterprises averaged 24.53 per cent, according to the Ministry of Finance. Becky Lai, Deloitte Touche Tohmatsu's partner and tax financial services leader for China and Hong Kong, said the mainland had unified the law and the rate to 25 per cent and also standardised deductions, so all businesses had the same rules for deductions and incentives. Ms Lai said the new tax law was designed to eliminate the previous laws with incentive bias for foreign investments, and moved the nation away from low-end manufacturing. In 1991, the old Foreign Enterprise Income Tax Law was introduced, which provided tax incentives on production at a time when the mainland needed foreign investment. In 1994, further income tax reforms for domestic enterprises set in train two sets of tax laws - one with incentives for foreign enterprises, and one without incentives for domestic companies. Foreign investment soared as the 'world's factory' kicked into top gear, but by 2004, when the Ministry of Finance announced it would relax trading restrictions, and then in 2006, when the mainland complied with World Trade Organisation requirements to open up its service industries - most importantly financial services - to foreign investment, it was apparent that the tax laws needed to change. The manufacturing powerhouse model was taking its toll - pollution had become an intolerable by-product and natural resources were waning. 'China is in the process of liberalising its service industries and trading services,' Ms Lai said. 'Over the past 20 years, China has learned a lot and it now aims to go up the value-added chain, from low-end manufacturer to high value-added, environmentally friendly manufacturing. 'It is also shifting its orientation to services and high-value outsourcing, and to new hi-tech projects and energy-conscious industries. We see this in the new tax law.' If you're a manufacturer of widgets in Guangdong, enjoying tax breaks, this is all bad news. Your taxes will rise, just as the new incentives are designed to attract different business. 'If Hong Kong enterprises were contract processing [contracting mainland factories to manufacture goods at a fee] they would not be affected, but if they had set up their own businesses over the border they will be subject to the new regime,' Ms Lai said. 'FIEs enjoying reduced rates will have a five-year transition period to the 25 per cent rate,' she added. 'But there are incentives for others. You can attain a 15 per cent tax rate if you're a new and hi-tech industry or service provider, if you are an environmentally friendly enterprise, or if you are involved in infrastructure projects. Service industries like banking, insurance, investment advisers and so on will be paying less, from 33 per cent to 25 per cent.' Smaller companies - foreign and domestic - are also eligible for a tax break, and all manufacturers are included. Those which employ 100 people or less, have a manufacturing taxable income of not more than 300,000 yuan (HK$335,133) and assets of not more than 30 million yuan are eligible to pay 20 per cent, and similar requirements exist for non-manufacturing services, except that the threshold for employees is 80 and assets is 10 million yuan.