Many Issues Unresolved In China's New Corporate Tax Law

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

13 June 2007

Guidance on China's new corporate tax law, expected to be published in October, could leave many issues unresolved, according to a tax expert.

Jiao Jianguo, a professor at Capital University of Economics and Business, told XFN-Asia that the guidelines "will be anything but complete" when they are released as the various interest groups strive to stamp their mark on the legislation.

China's long-awaited corporate tax reforms will unify the corporate tax rate at 25% for both domestic and foreign firms, flattening a tax regime which currently gives foreign firms the opportunity to whittle their effective corporate tax rate down to as low as 13% through the use of various deductions and tax breaks. The new tax law is due to go into effect on January 1, 2008, but there will be a five year phase in period to help foreign-backed firms adjust to the new rules.

The guidelines are due to be submitted to the State Council for final review this month, but these too are likely to be delayed.

According to Jiao, the main issues that are unlikely to be resolved include, among others, the tax exemption of fiscal reallocations to state-owned enterprises and non-profit institutions, the tax implications of donations, and the status of China's special economic zones.

Jiao added that the tinkering could last "well into the five-year phase-in period."

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