The Standing Committee of the National People's Congress (NPC), China's top legislature, yesterday mulled a draft law that aims to unify income tax rates for domestic and foreign companies to ensure a "level playing field."

The draft law, tabled at the 25th session of the 10th Standing Committee, suggests a tax rate of 25 per cent with a 5-year grace period for foreign businesses. The committee will vote on Friday on whether it should recommend the law to the full session of the NPC next March.

Companies in China currently pay income tax at a nominal rate of 33 per cent. But because of various tax waivers and incentives some of which were initiated in the early 1980s to attract overseas capital foreign businesses actually pay about 15 per cent while most domestic enterprises pay 24 per cent.

The generous incentives have fuelled foreign capital inflows. Figures from the Ministry of Commerce show that China has been one of the world's top destinations for foreign direct investment, hitting US$53.5 billion in 2003, US$60.6 billion in 2004, and US$72.4 billion last year in terms of the amount actually used.

However, the tax gap has sparked great controversy in recent years. Domestic companies facing tough global competition after China's entry into the World Trade Organization in 2001 criticize the two-tier tax system for offering an unfair advantage to foreign counterparts, while the latter complain that local businesses are able to obtain preferential loans.

Some domestic investors have even made use of the current policies by registering a company abroad and then come back as foreign investors for tax waivers.

To create a taxation environment that favours fair competition among all ventures in China, Finance Minister Jin Renqing said yesterday that the reform of the tax system should not be delayed.

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