China Begins To Level Tax Playing Field For Local Firms

by Mary Swire, Tax-News.com, Hong Kong

12 September 2006

The Chinese government has taken perhaps its first serious step towards unifying its local and foreign corporate tax system by doubling the tax threshold for domestic firms.

As a result of the change, domestic companies can deduct from their taxable income 1,600 yuan (US$200) per employee per month, up from 800 yuan, the State Administration of Taxation said in an online statement published last week.

The move follows new data showing that the average monthly income of urban residents in China had almost doubled since 1999 to about 1,530 yuan.

A senior SAT official was quoted by the Xinhua news agency as describing the move as "a significant adjustment" that is aimed at equalising taxation rates between domestic and foreign-funded firms.

While it is expected that the move will lead to a US$1.5 billion cut in tax revenues for the Chinese government, the official stated that this loss would be "bearable".

In a bid to attract foreign investment, foreign-funded firms are able to whittle their corporate tax rate down to about 15% by using preferential provisions contained in the Corporate Income Tax Law. By contrast, domestic firms are required to pay corporate tax at a rate of 33% under the Provisional Ordinance on Corporate Income for Local firms.

Beijing has intended for some time now that a level playing field should be introduced so that all firms pay the same rate of corporate tax (likely to be about 25%), but legislation has stalled in the National People's Congress, as pressure from foreign corporations to retain the current system has grown.

Recent figures have also shown a 1.16% fall in foreign direct investment into China in the first six months of the year, compared to the previous year, to US$32.71 billion.

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