China Changes Sales Tax Policy As WTO Entry Approaches

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

10 April 2001

According to the Chinese media, the Ministry of Finance has decided to adjust its sales tax policy in order to create a more level playing field amongst foreign and local companies. The move is in line with China's principle of "taxation fairness" and can be attributed in part to the country's impending entry to the World Trade Organisation (WTO).

Only last week the Finance Ministry announced plans to reduce the business tax for domestic banks and insurance firms by 1 percentage point each year from its current rate of 8 per cent to reach 5 per cent in 2003, as a direct response to complaints from China's financial institutions that the State gives an unfair advantage to their foreign rivals in the form of concessional tax rates.

In a further move, the government has now decided to abolish a preferential policy which exempts newly established foreign-funded firms and foreign financial companies from paying sales tax on their revenues from two of China's special economic zones. The tax breaks for new firms in the Suzhou Industral Park, in Jiangsu province near Shanghai, and Pudong New District in Shanghai, were set for a period of five years and were offered in order for China to attract increased foreign investment.

China's system of tax incentives and special economic zones is gradually being dismantled although the Finance Ministry has not said when the adjustments to the sales tax policy for the special economic zones will take effect.

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