China To Draft Corporate Tax Unification Law By Mid 2006

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

07 March 2006

The Chinese government is accelerating its push to reform the country's corporate tax regime, and new legislation that will unify the corporate tax rate paid by domestic firms and foreign-backed enterprises will be submitted to the cabinet in the summer, according to one senior minister.

Vice Finance Minister Lou Jiwei was quoted by the Xinhua state news service on Monday as stating that the State Council will submit to the Standing Committee of the National People's Congress (NPC) plans for a new corporate tax law by August.

Currently, the official rate of corporate tax in China is 33%. However, in an attempt to attract higher levels of foreign investment as the authorities sought to develop a market-based economy, various deductions and waivers have allowed foreign-funded firms to pay tax at an effective rate of 14%, whilst domestic firms effectively pay corporate tax at about 24%.

While it is uncertain at what level the government will set set the unified corporate tax, ministers have previously hinted that all firms will pay tax at a similar rate to that currently paid by domestic firms.

The Chinese government has played down fears that increasing the corporate tax rate for foreign firms will lead to a decrease in investment coming from overseas. Jiang Enzhu, spokesman for the National People's Congress, told reporters that the new law would "not have a big impact on China's efforts to attract foreign investment".

Jiang also stated that corporate tax unification is commensurate with the government's efforts to modernise its tax system in line with the pace of economic reform.

“It has been four years since China joined the World Trade Organization in November 2001, with improvement in the country’s market system. Therefore, it is necessary to make relevant laws and provisions concerning all income taxes on all kinds of companies. This is aimed to ensure fair market competition among various enterprises," Jiang explained.

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