Proposed reforms of China’s enterprise income tax system will end the preferential tax rates enjoyed by foreign funded firms and level the playing field for domestic firms, the Chinese media reported yesterday.
A report in China Daily has revealed that the government has already set the wheels in motion towards this end with the Ministry of Finance and the State Administration of Taxation (SAT) having completed proposals for tax reform.
"The scheme will soon be submitted to the State Council for further discussion and to the National People's Congress standing committee for approval," explained Zhang Peisen, a senior researcher with the Taxation Research Institute of the SAT, according to the paper.
The differential between income tax rates paid by domestic and foreign funded firms can be high. Whilst Chinese companies are typically taxed at around 33%, local authorities may set tax rates as low as 15% for foreign enterprises. In the initial stages of economic liberalisation, the government was happy to encourage foreign firms with lower taxes as non-tax barriers, such as tariffs and import quotas, balanced the effect of this dual tax system. However, China’s entry into the World Trade Organisation will mean the sweeping away of these trade barriers and it is felt current tax system will not enable domestic firms to compete in the world markets.
"The more open market needs a fair tax environment for domestic and foreign-funded companies so that they can compete on an equal footing," noted Ni Hongri, a senior researcher with the State Council's Development Research Centre, also quoted by China Daily. Ni added that removing this income tax incentive for foreign funded firms would not preclude the government from offering them other forms of tax break in the future.
Neither a timetable for the reforms, nor the rate at which the unified tax rate will be levied, have been announced by the Chinese authorities. However, experts suggest that the new system will be in place some time next year, with a rate of 25% to 27% representing a likley scenario.
http://www.chinadaily.com.cn/english/doc/2004-09/07/content_372161.htm
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