Foreign Firms Closer to Losing Income Tax Privileges

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Last updated at: (Beijing Time) Monday, January 28, 2002

Foreign Firms Closer to Losing Income Tax Privileges

China has moved a step closer to implementing a unified enterprise income tax policy to end the dual-track system favorable to foreign-funded companies.
On January 1, the central government began to co-share enterprise income tax with local governments.

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"Co-sharing the income tax has laid a solid foundation for enterprise income tax reform," Vice-Finance Minister Lou Jiwei said at a closing ceremony of a taxation policy analysis project, run jointly by his ministry and US-based accounting firm Deloitte Touche Tohmatsu, held last week in Beijing.

Dual-Track System Unfair

Before January 1, companies under the central government departments handed their income tax to the central government, while companies under local governments handed their tax to local governments.

"The enterprise income tax reform will undoubtedly affect the income distribution between the central and local governments," Lou said. "Co-sharing the income tax will make the reform easier."

The dual-track enterprise income tax was unfair to Chinese enterprises following China's entry into the World Trade Organization (WTO), said Jin Renqing, director of the State Administration of Taxation.

The income tax rate for domestic companies was 33 per cent, while that for foreign-funded companies stood at 17 per cent.

Equal Tax Treatment Urged

"The general trend is for equal tax treatment because domestic and foreign-funded companies should compete on an equal footing," Jin said.

Important Role in Attracting Foreign Investment

Tax incentives have played an important role in attracting foreign investment when the Chinese market was not fully open, said tax expert Ni Hongri, of the Development Research Center under the State Council.

Figures from the Ministry of Foreign Trade and Economic Co-operation indicate China had approved 390,484 foreign-funded enterprises by the end of December, involving US$745.91 billion in contractual investment and US$395.47 billion in actual investment.

Last year, taxes paid by foreign companies rose 57 per cent to 51.1 billion yuan (US$6.2 billion), accounting for 3 per cent of China's total tax revenue.

More Advantages than Disadvantages

The preferential policies also led to a serious loss of the country's tax income, she said.

However, tax incentives brought more advantages than disadvantages, because the incentives co-existed with such non-tax trade barriers as higher tariffs and import quotas enjoyed by domestic companies, she said.

Trade Barriers to Be Broken Down

"The country will have to gradually remove trade barriers following the WTO membership, Ni said.

Meanwhile, the country will open more sectors, including banking, insurance, telecommunications, trade and tourism to foreign investors.

It also aims to provide an improved market system to include a more complete and transparent legal system, more open markets and more efficient administrative functioning. The more open market needs a fair tax environment for domestic and foreign-funded companies so that they could compete on an equal footing, Ni said.

Gov't Ponders on Ending Tax Breaks for Foreign Firms

China is considering implementing a unified income tax policy to end tax favours that foreign-funded companies currently enjoy, an official with the Ministry of Finance said, as China has entered WTO and is trying to create an equal competition environment for foreign and domestic companies.

China to Continue to Improve Market, Economic Order

China will continue its efforts to rectify and regulate the market and economic order this year, targeting at fake and substandard goods and their producers, smuggling, tax evasion and other economic crimes, said Chinese Vice-Premier Li Lanqing on January 24.

Tax Revenue of China in 2001 Tops US$182 Billion

Total Tax Revenue Reached 1,517.2b Yuan

China's total tax revenue in 2001 reached 1,517.2 billion yuan (182.8 billion U.S. dollars), fulfilling the year's target by 113.1 percent, said said Jin Renqing, commissioner of the State Administration of Taxation (SAT) at a press conference on January 10, 2002.

China Cuts Tax By Tens of Billion Yuan Annually

China has lowered its tax rates by tens of billion yuan annually these years. It has stopped collecting regulatory tax on the direction of fixed asset investment with a drop of 20 billion yuan of the tax revenue.

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