The Standing Committee of China's National People's Congress
(NPC) is scheduled to review a draft on Dec. 24 on the unification
of income tax rates for Chinese and foreign-invested
enterprises.
The date was decided on Friday at a meeting of the NPC Standing
Committee's chairman and vice-chairpersons and, if adopted, the
bill will bring about the country's largest taxation policy
adjustment in two decades.
According to the current law, the income rate for domestic
enterprises is 33 percent and that of foreign-invested businesses
is 30 percent, set by two separate laws passed in 1985 and
1991.
But through pre-tax deduction, preferential tax rates and tax
rate differences, the actual income tax rate can be as low as 13
percent for foreign enterprises but still around 25 percent for
domestic enterprises.
Foreign companies fully expect to come off worse when the tax
rate is leveled but the Chinese government has remained
tight-lipped over the details of the new policy.
"The current tax gap is a discrimination against China's
domestic enterprises," said Mei Xinyu, a researcher with an
institute under the Ministry of Commerce.
Five years after China's accession to the World Trade
Organization (WTO), the country has opened almost all of its
economic sectors to foreign capital and cancelled most market
access restrictions against foreign businesses, Mei said.
"Today, both domestic and foreign enterprises are competing in
the Chinese market. There is no basis for differentiated tax rates
any more," he said.
If the discrimination remained, he said, it would undoubtedly
reduce the competitiveness and thus hinder the development of
China's domestic enterprises. It could also result in the Chinese
people believing their government is not willing to safeguard their
interests, he added.
"A unified tax system will help calm troubled waters," he
said.
According to the procedure of the NPC, the draft will have to be
reviewed three times before becoming a law.
China's central bank has made its opinions clear. In a recent
report it said the favorable tax policies for foreign enterprises
should be adjusted in a timely fashion.
"If you want a fair competition, you must first remove
discriminative policies and then favorable ones," said Ma Yu, a
researcher with the China's Academy for Economic and Social
Research.
"China's ability to attract foreign capital will not necessarily
fade after unifying the tax rates," said Yang Yuanwei, an official
with the State Administration of Taxation.
"The removal of a favorable tax policy is a minor setback
compared with China's huge market potential," he said.
"But for domestic enterprises, the unification of the rates
signal that all the enterprises have returned to the same starting
point," he said.
(Xinhua News Agency December 16, 2006)