Backgrounder: Corporate Income Tax Law

Source: CCTV.com | 03-08-2007 16:57

The new tax reform is expected to have far-reaching influence on businesses in China, for both local and overseas enterprises. Experts say that the move is designed to improve the country's economic system, rather than to change the policy on foreign investment.

Shanghai opened up to the world in the early 1990's.

The crude business environment back then was far from enough to impress foreign investors. But favorable policies did work, with preferential taxes at the core.

Some 20 years later there have been some big changes. The investment environment in Shanghai, as well as the rest of the country, has dramatically improved. And that calls for a corresponding adjustment to China's economic policies.

Mei Xinyu, researcher Academy of Int'l Trade & Economic Cooperation, said, "The situation is totally different today. China is now a better place for foreign companies. The country needs to treat domestic and foreign companies on the same basis, that will be vital to develop our national economy, as well as to attract good quality foreign investment."

The current tax rate for state-owned firms is 33%, while the average for most foreign firms in the country is 15%.

With the deepening of reforms, China has seen the revitalization of its state-owned economy. Private firms are also booming in recent years. The calls for fair tax treatment are getting louder.

Zheng Yuewen, CPPCC member, said, "The different tax rates have now become a form of discrimination for domestic companies. It damages our competitiveness. Currently, most Chinese enterprises are not supported and protected by the government and the Chinese market has opened much wider for foreign firms. We need a level playing field."

Thousands of miles away from China, the British Vergin Island in the Atlantic Ocean has now become a base for many Chinese investors. But most of them are doing business in China. Registering there is mainly to secure "foreign investor" status, and the tax advantages that it affords.

Wei Xinyu said, "According to what I know, currently nearly one third of our foreign investment is fact rerouted Chinese capital. This reflects the distorted taxation system in our country."

The draft law proposes a unified tax rate of 25% for both domestic and foreign companies. Many foreign firms accept the tax hike. They say that when making investment decisions, factors such as political stability, strong economic momentum and market potential are much more important than mere tax policies.

A UN report shows that, as a major destination for FDI, China has now become the most popular place for multinationals to set up their research and development bases. Experts say that unifying the tax rate does not mean any policy move directed towards foreign investment. Instead, it's a big step forward in the improvement of China's market-oriented economy.

Editor:Du Xiaodan