China yesterday formally proposed a unified corporate tax for
overseas and domestic companies by submitting a draft law to the
top legislature, the National People's Congress (NPC), during its
ongoing annual session.
Under existing corporate income tax laws, domestic companies pay
33 percent income tax, while overseas-funded firms pay 15 percent,
which some economists say comes down to 11 percent after the many
tax breaks they get. The proposed law aims to impose a flat 25
percent tax on both, and provide them with a level playing
field.
NPC deputies are scheduled to vote on the tax bill on March 16,
the last day of the session, and if passed, the law will become
effective from next year.
Economic and legal experts welcomed the move, saying the draft
corporate tax law was a sign of major progress in the country's way
of attracting overseas investment.
A unified corporate income tax will promote fair market
competition, China University of Politics and Law's senior law
professor Li Shuguang said. The separate tax rates are against the
World Trade Organization's principle of fair and equal
treatment.
And even after the change, China's overall corporate income tax
would not be high compared to other economies either in the region
or across the world, Li said.
In fact, Minister of Finance Jin Renqing told NPC deputies
yesterday that the 25 percent rate was lower than the average tax
rate in 159 economies that had adopted a corporate tax regime and
the average rate levied by 18 neighboring economies.
After the enforcement of the new law, the finance ministry
expects domestic firms to pay 134 billion yuan (US$17.3 billion)
less in taxes every year and overseas companies, 41 billion yuan
(US$5.3 billion) more.
Overseas firms, however, will enjoy a five-year grace period,
during which the new tax rate will be phased in. "This will
minimize the impact on overseas firms," Li said.
With a unified tax, China will no longer seek overseas
investment by offering extra financial incentives as it had done
for the past two decades. Instead, it will offer a more competitive
business environment, including the rule of law.
Having two sets of tax rates was a necessity for the country in
the early days of its economic reform, said Lin Yifu, leading
economist and member of the Chinese People's Political Consultative
Conference (CPPCC) National Committee, the top political advisory
body.
China used the tax incentives then to attract investors from
abroad because it had to build its market environment and suffered
from a considerable lack of capital and foreign reserves, he
said.
But the country has taken great strides on the economic front
since then, and its market condition and capital reserves today are
strong. "As a natural result," he said, "the time is ripe to have a
unified tax system."
A lower tax rate does not sustain investor confidence, rather a
stable market. Ample human capital and healthy market potential are
needed for that, Lin said.
Peking University's senior economist Li Yining corroborated Lin,
saying: "Foreign investors will consider multiple factors such as
the investment environment and market potential. I believe they
will increase their investment after the tax rate is adjusted."
The tax law reform reflects China's efforts to build a
consistent system to guarantee the stable and sound development of
its market economy.
Foreign investors have long complained against China's
"disorderly and changeable" policies. Now the country is using the
law to have an all-binding tax across the nation, Li Shuguang said.
"It actually is good news for foreign investors because China is
building a rule-based economy."
The proposed law also stipulates a series of tax breaks to
promote high-technology, environmental protection and energy-saving
industries.
(China Daily March 9, 2007)