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Tax breaks enjoyed by foreign-invested companies in China are destined to come to an end, now that the country has become a member of the World Trade Organization, experts and government officials said.
For years, tax experts and domestic entrepreneurs have urged the government to unify income tax regulations for domestic and foreign-funded companies to level the playing field.
The calls became even louder last week when delegates to the All-China Federation of Industry and Commerce submitted a proposal to the ongoing Chinese People's Political Consultative Conference, pressing the government to unify income tax regulations as early as possible.
Domestic companies have been carrying too heavy a tax burden, the proposal said, adding that current laws, which offer only small pre-tax deductions, made their tax contribution relatively greater than that of foreign counterparts.
This situation was harming the performance of domestic companies on the international stage, the proposal went on to say.
China is now practicing dual-track enterprise income tax policies for domestic and foreign-invested companies.
The income tax rate for domestic companies is 33 per cent, while that for foreign-funded companies is about 17 per cent.
"The tax incentives (for foreign-funded companies) have played an important role in attracting foreign investment while the Chinese market was still in the early stages of opening up," said Ni Hongri, a senior research fellow with the Development Research Center under the State Council.
The preferential policies have also led to a serious loss of tax revenue for the country, she said.
However, the tax incentives in the previous environment resulted in more advantages than disadvantages, because they co-existed with such non-tax trade barriers as higher tariffs and import quotas enjoyed by domestic companies, she said.
Now that China has become a member of the World Trade Organization, the country will have to gradually remove trade barriers, Ni said.
Meanwhile, the country will open more sectors including banking, insurance, telecommunications, trade and tourism to foreign investors.
This situation calls for a fairer tax environment for domestic and foreign-funded companies so that they can compete on an equal footing, she said.
Zhang Peisen, a senior expert with the Taxation Research Institute under the State Administration of Taxation (SAT), agreed, adding there is an urgent need for the country to unify the enterprise income tax policies as early as possible.
"Domestic companies were treated unfairly for years," he said.
Unifying the tax policy won't hurt China's efforts to utilize foreign investment, he said.
"What foreign companies cherish most in China is a stable economic and social environment, not merely tax favors," he said.
The economic miracle created by China amid the world economic slowdown has made the country very attractive to foreign companies, he said.
However, Ni said China is unlikely to implement a unified income tax this year.
"I didn't see any changes in China's tax system this year, when reviewing the year's revenue budget included in the government report delivered by Premier Zhu Rongji," she said.
"If there were changes, the budget would have to reflect the results," she added.
Ni's comment was in line with what Director Jin Renqing of the State Administration of Taxation said in January at a press conference. "China would not put an end to the tax breaks enjoyed by foreign-funded firms soon," Jin said.
"We are still studying the issue, because it is extremely complex and important," Jin said. "We have to be very prudent and give careful consideration to the issue."
The unification of the income tax policies should be in line with the WTO requirements and benefit the further development of China's opening-up, utilization of foreign investment and increasing domestic companies' competitiveness, he said.
There was no timetable for implementation of the new tax policy, he said. "We have to choose a good time to carry out the unified enterprise income tax policy."
Meanwhile, China is still considering a new tax rate, Jin said.
The rate should be acceptable to both domestic and foreign-funded companies, he said.
(China Daily March 10, 2003)
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