Liao Luming, the director of the Chinese finance ministry's general office has outlined a new unified corporate tax law, which aims to treat domestic and foreign corporations on equal footing, effectively raising corporate income tax for foreign-invested enterprises.
The government plans a unified tax rate of between 24% and 28%. Foreign-invested companies are now subject to a 20% corporate income tax rate, while the domestic rate is 33%. These attractive rates have helped make China the second largest recipient of foreign investment in the world.
"There has been pressure from Chinese companies that say the system up until now has been unfair," said Suzie Chen, a tax manager at HSBC in Shanghai. "It is hard for them to compete with foreign companies now. These changes will affect China's attractiveness to foreign companies, but it will not be a big problem because investors consider other advantages and costs, not just tax issues."
A finance director at a leading multinational agreed: "The increase in corporate tax will have some negative impact. But most multinationals that have invested heavily in China did so because of the competitive labour and infrastructure costs."
China has several special economic zones in which companies benefit from tax incentives designed to attract foreign investors and companies into the country. The government is considering amending this system in favour of tax incentives for specific industrial sectors.
The new law could be implemented as early as January 1 2006 to meet pledges China made when it joined the World Trade Organisation in 2001.
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