Reform of enterprise income tax discussed
By Xu Dashan (China Daily)
Updated: 2004-09-07 08:42

Reform of China's enterprise income tax, which would end the tax advantages enjoyed by foreign-funded companies, has been put on the government's agenda.

Relevant government departments, including the Ministry of Finance and the State Administration of Taxation (SAT), have completed the design of the tax reform scheme, said Zhang Peisen, a senior researcher with the Taxation Research Institute of the SAT.

"The scheme will soon be submitted to the State Council for further discussion and to the National People's Congress standing committee for approval," he said.

The current enterprise income tax policies are unfair to domestic companies, said Zhang.

China is practising dual-track income tax policies for domestic and foreign-funded companies.

The income tax rate for domestic companies is 33 per cent, while that for foreign-funded firms about 17 per cent.

"Domestic companies bear too heavy a tax burden," Zhang said.

The situation was unfavourable for domestic companies participating with international competition, he said.

"The government should implement a uniform income tax policy for domestic and foreign-funded companies," he said.

Ni Hongri, a senior researcher with the State Council's Development Research Centre, said there was an urgent need for the government to introduce equality into enterprise income tax policies.

Under the existing tax system, foreign companies are actually enjoying highly favourable treatment, she said.

This preferential tax policy was necessary to attract foreign investment during the early stages of China's opening-up and reform.

At that time, the tax incentives resulted in more advantages than disadvantages, because they co-existed with non-tax trade barriers such as the higher tariffs and import quotas enjoyed by domestic companies, said Ni.

Now that China has become a member of the World Trade Organization, it will necessarily have to gradually remove trade barriers, she said.

The country will also open more sectors to foreign investors.

"The more open market needs a fair tax environment for domestic and foreign-funded companies so that they can compete on an equal footing," she said.

Ni said uniformity of tax policies would not harm China's efforts to utilize foreign investment.

"What foreign companies valued most in China was a stable economic and social environment, not mere tax favours," she said.

The economic miracle created by China during recent years has made the country a major attraction to foreign companies, she said.

A uniform tax policy does not mean, she said, the government would no longer offer tax favours to foreign-funded companies.

The government could offer tax incentives to certain foreign-funded companies, as and when appropriate, and in line with the requirements of the country's macroeconomic development, Ni said.

Professor An Tifu of Renmin University of China said the government should have introduced uniform dual-track income tax policies before the country joined the World Trade Organization in 2001.

"Equal tax treatment for all companies is in line with the international practice," he said.

The government is likely to implement the new policy sometime next year, he said.

Earlier this year, SAT director Xie Xuren said the government had not set a timetable for implementation of the new tax policy.

"We have to choose a good time to carry out a uniform income tax policy," he said.

Uniformity of income tax policies should be in line with WTO requirements and be beneficial to the further development of China's opening-up, utilization of foreign investment and increasing domestic companies' competitiveness, he said.

"We have to be very prudent and give careful consideration to the issue," he said.

Zhang suggested a new tax rate had not yet been decided, because disparities still exist.

"Some said the rate should be 25 per cent, while others said it should be 27 per cent," he said.

Niu Li, a senior economist with the State Information Centre, said a uniform tax policy spells good news for domestic companies.

"Less taxes means more profits," he said.