Full Text: Explanation on China's draft enterprise income tax law - 2

Great changes have taken place in China's economy and society, and the socialist market economy has initially taken shape. With China's accession to the WTO, the Chinese domestic market has been further open to foreign capital; domestic enterprises have gradually integrated themselves into the world economy and are facing ever-increasing competition. If different tax policies continued to be implemented for domestic and foreign-funded enterprises, the former would definitely be put at a competitive disadvantage and the establishment of a unified market with standardized and fair competition would be obstructed.

Moreover, problems are becoming increasingly manifest in the implementation of the current income tax systems for domestic and foreign-funded enterprises and these taxation systems can no longer meet new situations in China:

First of all, rather large differences between the current domestic and foreign-funded enterprise tax laws have imposed unfair tax burden on different enterprises. Under the current income tax laws, foreign-funded enterprises enjoy more favorable and preferential treatment than that for domestic enterprises with respect to policies in tax preference and deductions. An estimate based on a national survey of enterprise income tax sources shows that the average enterprise income tax burden on foreign-funded enterprises is 15 percent while that on domestic enterprises is 25 percent, 10 percentage points higher than that on foreign-funded enterprises. Domestic enterprises strongly call for unifying taxation treatment and fair competition.

Secondly, some loopholes in current preferential policies on enterprise income tax distort enterprise behaviors and lead to revenue loss. For instance, some domestic enterprises enjoyed tax preference for foreign-funded enterprises by transferring their funds abroad and then investing them back to China.

Thirdly, great changes have taken place in China's economy and society during the past decade and more since the current domestic enterprise tax law and foreign-funded enterprise tax law were enforced. It is therefore necessary to have them timely revised and improved in line with new situations. Many important taxation policies in regulatory documents issued by government agencies shall also be timely incorporated into law.

In order to solve above mentioned problems in current enterprise income tax systems, it is necessary to unify domestic and foreign-funded enterprise income tax as soon as possible. The reform of unifying the two income tax laws will not only promote improvement in China's economic structure and upgrading of its industries, but help foster a legal taxation environment for fair competition. It is an institutional innovation adaptable to the new stage of China's socialist market economy and a supporting measure embodying "Five Balances" which will promote the sustainable development of the national economy and society. It is one of the landmarks featuring the gradual maturity and standardization of China's economic system, and a consensual voice of all walks of life.

China's economy is at a stage of rapid development. The overall performance of enterprises has increased considerably in recent years and fiscal revenues maintained strong momentum of growth. Under such circumstances, the conditions are ripe to launch such a reform by drawing on foreign practices because both the Government and enterprises are financially stronger to withstand the impact of the enterprise income tax reform.

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