Chinese Premier Wen Jiabao said Monday that the timing and conditions are now ripe for unifying the enterprise income tax rates for domestic and overseas-funded enterprises to "level the playing field."
Wen made the remark while delivering a government work report to the just-opened National People's Congress (NPC) annual session, which will deliberate the draft law on equalizing corporate income tax for both domestic and foreign companies.
The unified income tax rate will help foster a fairer, more regulated and transparent taxation system for all kinds of businesses, and help improve the quality and standard of China's utilization of foreign investment, Jiang Enzhu, spokesman for the annual session of NPC, said Sunday.
"The law still in draft will neither cause massive influence on foreign companies nor affect their enthusiasm of investing in China," Jiang said.
The bill suggests unified income tax rates for domestic and foreign companies at 25 percent, according to earlier reports.
The lawmaking process, initiated last December, aims to ease years of criticism that the original dual income-tax structure is unfair to domestic enterprises.
The income tax rate for Chinese companies is currently set at 33 percent, while their foreign counterparts, which benefit from tax waivers and incentives, pay an average of 15 percent. However, both actually pay less due to other flexible preferential policies.
Many people believe that such a policy handicaps domestic businesses which have to face tougher competition since China's accession to the World Trade Organization (WTO) in 2001.
The reform on corporate income tax marks the maturity of China's socialist market economy, said Shi Yaobin, director of the taxation policy department under the Ministry of Finance.
"It does not intend to put restrictions on foreign companies nor to counteract their too small tax contributions before. The purpose is to create a fair environment for competition," Shi said.
Experts agree that the tax change is actually a commitment to the WTO for equal treatment to enterprises, which can only strengthen China's responsible role and make it more attractive to foreign investment.
Joseph Lee, a tax and business advisory partner of Ernst & Young Beijing, is sure that a ten-percent tax increase will not crush out the zest of foreign investment.
"What weighs in their decision is China's huge market potential. The appeals are not only confined to preferential tax policies," said Lee, who has provided 20 years of consulting service on taxes for multinationals.
Carlson Wagonlit Travel (CWT), the second largest travel management company in the world, has just declared an ambitious plan of expanding business in China. The past five years has witnessed its sales volume up by an annual rate of 34 percent, higher than its branches in other places.
"Tax rate does not top our concerns," said CWT President Hubert Joly, adding that what he cares most is how to raise the ratio of Chinese companies among customers from the current two percent.
A research report from the World Bank analyzed that stable political situation, sound economic development, broad market, rich labor sources as well as increasingly upgraded business infrastructure and government service in China are the major factors attracting foreign investment.
Tax incentives are usually considered less important than transparent taxation and indiscriminate government policies, said the report.
Meanwhile, the Ministry of Finance has promised it would allow a transitional period to offset the impact on foreign companies.
"The income tax rate will be gradually increased to the 25 percent during that period, and foreign enterprises can still enjoy tax breaks within a regulated time limit," said Shi Yaobin.
The current practice is new foreign investors can be exempted from income tax for two years and get a 50 percent cut for another three years.
Generous tax incentives have fueled foreign capital influx. China has been one of the world's top destinations for foreign direct investment, taking in US%53.5 billion in 2003, US$60.6 billion in 2004, and US$60.3 billion in 2006 in terms of the amount actually used.
Last year, China reported a record tax revenue of 3.76 trillion yuan (US$482 billion), excluding tariffs, tax on farmland acquisition and tax on real estate contracts. Foreign- funded companies contributed 153.4 billion yuan (US$19.7 billion), or four percent of the total.
Experts point out that the 25-percent tax rate is still favorable compared with those in some countries and regions. What's more, they expect the unified corporate income tax exert deeper influence on the country's economic growth patterns.
Preferential tax policies will be shifted to investment in projects concerning environmental protection, water conservation, production safety and high-tech development, according to the draft law.
It will also spur local authorities, which often offer various tax incentives to lure investors for usually a reckless GDP growth, to head toward a scientific development mode, experts say.
Some multinationals have adapted their business plans to the policy change. GE (General Electric) China has announced it will invest US$50 million in its Shanghai-based technology center for products serving environmental protection, including more efficient airplane engines and wind power generators, seawater desalination technology, and energy-saving bulbs.
Steve Bertamini, chairman and CEO of GE North East Asia, packed the new series of products into the idea of "eco-imagination", saying the "green" business will become China's most booming industry in the future.
(Xinhua News Agency March 5, 2007)