China To Pilot Key Tax Reforms Next Year

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

28 November 2003

The Chinese government is to launch a pilot scheme of tax reforms next year which it hopes will encourage firms to invest more in technology, especially in the north eastern ‘rust belt’ industrial region.

There are to be two key areas of reform that will see firms exempted from VAT on equipment purchases, currently levied at 17%, and corporate tax unified for both domestic and foreign businesses. The scheme is to be piloted in three provinces (Liaoning, Jilin and Heilongjiang) from January 2004.

"This means the tax base will be shrunk, so if we want to increase revenue that means we have to increase the tax rate, which we are quite reluctant to do," Lou Jiwei, vice-minister of finance, told the Financial Times. "But this reduction in fiscal revenue comes from the tax exemption for equipment investment. This kind of reform will...stimulate the economic enthusiasm of enterprises."

However, whilst the tax changes will lower the tax burden on Chinese firms, foreign firms are likely to pay more after corporate tax is unified. According to official figures, foreign firms in China pay an effective corporate tax rate of 13%, whilst domestic enterprises pay 25%. This is despite the actual rates of corporate tax being 15%, and 33% respectively.

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