Unification Of China’s Corporate Tax Rate Unlikely Before Mid 2006

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

23 May 2005

A spokesman for the Chinese government has indicated that the income tax rate paid by domestic and foreign-funded enterprises will not be unified until the middle of 2006 at the earliest.

According to Lou Jiwei, vice-minister of finance, the Chinese government will not be able to begin the process that will level the tax playing field between local and foreign firms until the next session of China's National People's Congress in March 2006. Moreover, the need to allow time to notify firms of the changes mean action cannot be taken until the second half of next year, he told the Financial Times last week.

Beijing first indicated its intention to unify the corporate tax rate in 2003, saying that the differential rates (11% to 14% for foreign companies versus 24% for local companies) amounted to unfair competition. In March, Jin Renqing, the minister of finance, a notable hawk on the issue, proposed leveling up the rate to 24% for all companies, asking: "The Chinese market is the best in the world, so how could foreign investments ever disappear?"

Whilst foreign firms have accepted the need for unification, 54 major international companies joined forces in January to lobby the Chinese government for a transition period of five to ten years, something which the government appears to have taken on board.

Eventually, China has no choice in the matter under WTO rules, but in practice there is little to stand in the way of an extended transition period.

In separate news, a Chinese Tax Bureau official has reportedly claimed that foreign companies avoid paying 30 billion yuan (US$3.6 billion) in taxes annually. The China Tax Bureau recently stated that foreign enterprises in China officially claim to lose about 120 billion yuan to reduce their tax bills.

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