China Confirms Introduction Of Unified Corporate Tax System

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

21 January 2005

A Chinese finance ministry spokesman has confirmed that the government is seeking to unify the separate corporate income tax systems for foreign-funded enterprises and domestic firms, with the reform process expected to be under way within two years.

At a recent briefing on China's economy, Lou Jiwei, vice minister of Finance, remarked that “the conditions are ripe” for the reform of the country’s corporate tax system, describing the changes as “an inevitable matter”.

“The existing system has caused grave inequality between foreign-funded and Chinese companies. That's against the principle of fair competition," Lou argued.

According to the Chinese media, the average corporate tax rate paid by foreign-funded companies is 11%, whilst domestic firms pay an average of 22%, and large enterprises 30%.

Under the reforms outlined by Lou, certain tax incentives will be removed or simplified, with income tax breaks offered on a geographical basis or by industrial sector.

"For example, a 15% rate will be applied on all new and hi-tech business no matter if it is inside or outside a new and hi-tech industrial development zone. A 15% rate will applied in China's western regions no matter the business is a domestic company or a foreign-funded company," Lou explained.

The vice Finance Minister hinted that the reforms could be phased in over a ten year transition period, a move that is likely to be welcomed by international corporations that have invested in Chinese operations.

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