China's fiscal revenues could shrink in 2008 if a levelized corporate income tax proposal now being considered by the national legislature is enacted, the finance minister said yesterday.

The decline could amount to 93 billion yuan (US$12 billion) or 2.5 percent of the total collected in 2006.

A file photo shows a worker assembling Volkswagen cars in a factory in Shanghai. Foreign firms operating in China will not be "greatly affected" by a new law, the Chinese finance minister said Mar 8, 2007. Jin Renqing made the remark to lawmakers as he introduced a new corporate income tax law that will raise the tax rate for foreign companies to 25 percent from the current 15 percent. [AFP]

Discussion on the draft law began yesterday at the annual session of the National People's Congress in Beijing, and a vote is expected next Friday.

The proposal would tax both foreign and domestic companies in China at a rate of 25 percent, although some incentives would still be available. Foreign companies are now taxed at an average 15 percent tax while Chinese firms pay an average 25 percent, according to Finance Minister Jin Renqing.

Should the draft law become effective in the 2008 tax year, tax income from domestic companies would drop 134 billion yuan compared with the current levy, and foreign-invested companies would pay 41 billion yuan more, Jin said in introducing the draft bill in Beijing yesterday.

"The government can afford the decline in tax revenue triggered by the new corporate income tax law," Jin said. "The new law would not cast a big shadow on China as it works to lure foreign investment."

The timing is right for the tax change, China's economy is booming and companies are enjoying rosy profits, he said.

"China's domestic companies are facing fierce international competition after the country joined the World Trade Organization," Jin said. "The current tax system, which imposes a higher burden on domestic companies, is unfair."

The present tax regime also pushed some domestic firms to transfer capital overseas before investing in China in a dodge to enjoy lower taxes.

Elton Huang, a tax partner at international accounting and consultant firm PricewaterhouseCoopers, said foreign investors may be mollified by a transition period built into the draft.

A five-year grace period would be granted to existing foreign-invested companies in China.

China's preferential income tax policies covering foreign enterprises, enacted in 1991, have helped make the country the world's biggest recipient of investment from overseas.

At the end of 2006, 594,000 overseas companies had been authorized to operate on China's mainland, bringing in US$691.9 billion in investment.

But domestic firms have long called for a level playing field, and the tide of foreign competition generated by China's entry to the WTO made the need for change critical for the survival of many local enterprises.

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