On March 16, the fifth session of the 10th National People's Congress passed a new corporate income tax law that will fix a flat tax rate of 25 percent for both domestic and foreign enterprises.

 

The new rate, which will lower the rate domestic firms pay while raising the rate foreign outfits pay, will take effect on January 1, 2008.

 

Though the move has been hailed as an attempt to level the corporate playing field, there is some concern over the effect this new rate might have in the Shenzhen special economic zone, where both foreign and domestic enterprises are currently entitled to a tax rate of 15 percent. However, such concerns are misplaced, several experts, entrepreneurs and senior government officials said recently.

 

"In the short term, some of the enterprises in the special economic zone could feel the effect, but from a long-term point of view a standardized tax rate will generate more pros than cons," said Yang Lixun, a professor at the Shenzhen academy of social sciences.

 

"The new law will not only eliminate the difference in the tax rates levied on domestic and foreign enterprises, but will also help establish a single, unified market within the country," Yang said. "With such a market, China will be more attractive a target for investment, and therefore Shenzhen, a key connection linking overseas and domestic markets, will benefit."

 

"The new law will help create a more transparent, stable and foreseeable tax system in China," said Joseph Tse, a tax-managing partner at Deloitte Greater China.

 

Under the existing tax system, Chinese enterprises pay a rate of 33 percent, while foreign firms pay 15 percent on average.

 

Like Yang and Tse, Guangdong Province Governor Huang Huahua does not foresee any problems with the new tax rate, which he described as "acceptable".

 

"The average (income) tax rate in the world's 159 countries is 28.6 percent. In the 18 countries around China it is 26.7 percent. Those are both higher than our new 25 percent tax rate so our tax is still at the low to medium end of the spectrum," Huang said.

 

Li Nanfeng, chairman of the Shenzhen International Trust and Investment Company, said the new tax rate would be "bearable" to local enterprises.

 

"The impact caused by the new tax law on Shenzhen's enterprises will not be dramatic," Li said. "After more than 20 years of growth, most of the enterprises in Shenzhen are at a certain economic strength and so should be equipped to bear the new tax."

 

Liu Pang, chairman of Shenzhen Dashi Intelligence Company, struck a similar note, saying the new rate would be a "good thing", especially for technology firms looking to expand in inland China.

 

"The 15 percent tax rate levied on enterprises in the advanced technology zone will remain unchanged under the new income tax regime but companies that move inland, away from the technology zones, will only have to pay 25 percent under the new rate rather than the 33 percent rate under the old system," Liu said.

 

The government will maintain the lower tax rate for companies that work in the high-technology sector to encourage innovation in the field.

 

Shenzhen Mayor Xu Zongheng previously said Shenzhen would cope with the new tax regime by "stepping up its efforts to innovate while expediting the development of its advanced new technology industry". The industry generated about 630 billion yuan ($81.5 billion) last year, representing 52 percent of the city's total output.

 

"The new income tax rate will not have as big an influence on Shenzhen as many people think because taxes are just one of the factors that enterprises must consider when investing in a city," said Charles Lee, a partner at PricewaterhouseCoopers.

 

"They will also look at the city's soft environment, which is generally measured by such criteria as geographic location, industry intensity, natural and human resources, government efficiency, client base and infrastructure ... Shenzhen's soft environment is still one of the best in China ... to remain attractive after losing its special tax status, Shenzhen will need to make the environment even better," Lee said.

 

(China Daily April 3, 2007)