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Foreign Firms In China To Lose Tax Privileges

by Mary Swire,, Hong Kong

03 January 2007

Foreign-funded enterprises operating in China could pay corporate tax at a rate of 25% from January 2008 if the Tenth National People's Congress (NPC) adopts new corporate tax proposals in March this year.

NPC Standing Committee members last week adopted resolutions to submit the drafts of the corporate tax law to the fifth full session of the NPC, China's highest legislative body, which convenes on March 5.

If adopted by the NPC in March, the earliest date that the draft proposals would become law would be January 1, 2008.

The draft legislation proposes to unify China's corporate income tax rate at a rate of 25%. Under current corporate tax law, domestic enterprises pay tax at a rate of 33%, while foreign-backed firms pay 30%. However, foreign-funded companies are able to utilise deductions and other benefits to whittle down their effective corporate tax rate to as low as 13%.

According to Wu Bangguo, Chairman of the NPC Standing Committee, the new law is essential to create fairness in the tax system and to "improve China's socialist market economic system."

Foreign-funded enterprises will reportedly benefit from a five-year transition to adjust to the new tax rate.

In a separate move to level the tax playing field between domestic and foreign-invested firms, the latter will lose their exemption from paying land use tax.

As part of a plans aimed at helping the government exert more control over the use of development land, current land use taxes, which have remained static for almost twenty years, will triple, and both domestic and foreign companies will pay the same rates.

The new tax rates will range from between 1.5 yuan to 30 yuan (US$0.20 to US$3.84) per square metre depending on the location of the land and its intended use, the Xinhua news agency reports.

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