IV. Impact on enterprise tax burden and fiscal revenues
With the implementation of the new Tax Law, the tax burden on different enterprises will change to a certain extent. Tax burden on a domestic enterprise will decrease while that on a foreign enterprise will increase slightly. However, the production and operation of old enterprises will not be seriously affected because they will continue to enjoy transitional preferential measures for a certain period. International experience has shown that political stability, sound economic development, big market, rich human resources, constantly improving legal environment and government services are main factors for absorbing foreign investment, and the tax preference is only one factor. Therefore, the new Tax Law will not exert a great impact on foreign investment.
With the entry into force of the new Tax Law, the statutory nominal income tax rate for both domestic enterprises and foreign- funded enterprises will see an eight percentage point decrease from 33 percent to 25 percent. However, for those foreign-funded enterprises that have been enjoying the preferential tax rate of 24 percent or 15 percent, their statutory nominal tax rate will rise by one or ten percentage points respectively. Since some foreign-funded enterprises may continue to enjoy preferential tax rates for hi-tech enterprises and small low-profit enterprises, and some others may enjoy transitional preferential tax policies, the current financial cost for foreign-funded enterprises will not be greatly affected after the new Tax Law becomes effective. Due to such factors as decreased statutory income tax rate and increased deductions, if the new Tax Law is implemented in 2008, domestic enterprise income tax will drop by 134 billion yuan while foreign-funded enterprise income tax will increase by 41 billion yuan and, therefore, fiscal revenues will drop by 93 billion yuan. Given that transitional measures will apply to old enterprises that have been enjoying the statutory preferential tax treatment, the decrease in fiscal revenues will be bigger, but such decrease is still acceptable to Government finance.
After the new Tax Law becomes effective, head offices will pay tax for their branches on a consolidated basis. This is likely to bring about tax source shift in some regions and affect the revenues of the regions from which tax sources are shifted. In the income tax sharing reform in 2002, we adopted measures such as tax prepayment and factor-based distribution of income tax revenues for trans-regional enterprises that pay tax on a consolidated basis, so that the issue of tax source shift is addressed to some extent. In addition, under the current practice of general transfer payment, the finance resources of the regions from which tax sources are shifted will be compensated to some extent. Following increasingly intensified efforts by the Central Government to balance financial resources among different regions, the role of this compensation mechanism will become more and more manifest. After the new Tax Law becomes effective, we will conduct a follow-up study of the issue of tax source shift and take quick steps to address new problems in this regard.
The Enterprise Income Tax Law of the People's Republic of China (Draft) and the explanation on the new law are hereby presented to you for deliberation.