China To Remove Foreign Tax Incentives

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

13 November 2001

Following China's admission to the WTO, officials in Beijing said on Monday that the government would remove differences in the tax treatment of local and foreign-owned companies.

Currently, foreign companies in the five Special Economic Zones (SEZs) and 49 smaller regional development zones pay a corporation tax rate of 15% as against the 33% rate for locally-owned companies.

One WTO rule is that there should be a level playing field for companies regardless of ownership. China must start implementing its obligations to the trade body after its parliament, the National People's Congress, ratifies its accession agreement, expected in the first half of 2002.

"Why should we continue to subject Chinese companies to disadvantages even after we have opened our big gate to foreign competition and joined the WTO?" asked one official. "It would not be fair."

No decision has yet been made over the timetable for levelling the fiscal playing field, or over what rate is to be charged once incentives are phased out. One faction favours a 25 per cent rate while another influential group prefers the full 33 per cent rate, officials said. "Making local rules conform with national laws will be a complex and time-consuming task," said one central government official.

It's difficult to calculate the effects of a change on the level of inwards investment. The five SEZs - the booming southern cities of Shenzhen, Zhuhai, Xiamen, Shantou and the island of Hainan - have undoubtedly benefited from the incentives, but their removal may be balanced by the surge of investment expected to result from China's admission to the WTO.

One thing at any rate will change: the use of "round-tripping", in which Chinese groups set up shelf companies in Hong Kong, which they then use as mainland investment vehicles in order to qualify for "foreign" rates of tax. This practice has inflated China's foreign direct investment figures for years.

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