Zimmerman's idea is echoed by the recently published European Business in China Position Paper 2006/2007, which says "the new Enterprise Income Tax Law will likely come into effect starting 2008, and its implementation may result in the elimination of some of the preferential tax treatments currently enjoyed by foreign investors. A transparent and smooth transition will be required, especially for foreign companies to adjust to the new law."

More importantly, the paper recommends authorities concerned provide foreign businesses a grandfathering period for the current tax incentives, such as a reinvestment refund, tax holidays and reduced tax rates.

Despite these suggestions, AmCham-China and the European Chamber seem to be reluctant to say goodbye to the old and prevailing enterprise income tax regime.

According to its position paper:"It has been very important in promoting foreign investment. Foreign companies are very supportive of the tax reform and the desire to achieve a more transparent and fair legislation environment. However, retaining some preferential policies would have a positive impact on both foreign and domestic companies."

Zimmerman agrees. "Foreign companies face many challenges when entering a new market, such as unclear regulations, lack of transparency and local protectionism. The preferential tax treatment provides a level playing field," he said.

But according to He Jun, senior analyst with Anbound Group, a local research company, China can't always rely on preferential policies to attract FDI and develop its economy.

"Foreign investors should look at the new law in a rational way. There are many other things that deserve their consideration when it comes to whether or not to invest in China, such as transparency in the processes of making the rules and regulations, as well as some unpredictable factors," he said.

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