China To Scrap Tax Break For Foreign Firms

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

11 January 2002

The Director of the Chinese State Administration of Taxation, Jin Renquing, announced on Thursday that now that China is a member of the World Trade Organisation, the government will be scrapping a tax incentive designed to attract foreign investment. However, there is, as yet, no timetable for the move.

Domestic firms typically pay income tax at a rate of 33%, and over the past few years, there have been increasing calls to scrap the favourable 15% tax for foreign firms. 'Income tax for domestic and foreign enterprises ought to be the same,' Jin told a news conference yesterday. 'Following WTO entry, the reform of income tax should be moving in this direction.'

Although various proposals have been floated, the most likely course of action for the government is to raise corporate income tax for foreign firms, while lowering it for domestic companies, in order to reach some middle ground.

However, tax holidays and other forms of preferential treatment in order to make China more attractive to foreign investors are likely to be permitted to continue. Jin also reassured existing foreign investors that they would not be left out in the cold:

'We will continue to honour commitments for favourable tax policies granted to already established foreign enterprises,' he promised.

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