The proposal to unify the tax rates of domestic and
foreign-funded firms has aroused heated debate nationwide. Despite
strong opposition from foreign-funded firms, many officials and
experts believe that a unified tax rate is inevitable, saying
current tax policies actually discriminate against domestic
firms.
The plan, drafted by the Ministry of Finance, was sent to the
State Council for discussion last August, but not finalized.
The Daily Economic News quoted Cong Min, vice director of
the State Council Research Office's macroeconomics department, as
saying that it will be submitted for discussion and approval at the
next session of the National People's Congress.
Currently, nominal income tax for domestic enterprises is 33
percent, while that of foreign-funded enterprises is only 15
percent. The ministry proposed a unified rate of around 24 percent.
Certain breaks would still be given to specific industries and
regions, but Chinese and foreign-funded firms would be treated
equally. Foreign-funded firms would also have 5-year transitional
period, during which additional tax will be refunded.
Fifty-four transnational companies, including Motorola, Nokia,
GE, Siemens, Samsung and LG, voiced their opposition to the
proposal in a joint submission in early January.
However, Finance Minister Jin Renqing pointed out that foreign
investment in China has a yield ratio of over 10 percent, and, set
against low-interest-rate US Treasury-bonds bought by China, this
means money is actually being transferred to the US.
Lou Jiwei, vice minister of finance, also stressed in mid
January that it was inappropriate to grant foreign-funded companies
preferential treatment now that China is enacting WTO reforms. The
different rates and thresholds also bring difficulties for tax
collection, he said.
Dr. Mei Xinyu, a researcher from the Ministry of Commerce,
agreed with Lou, attributing existing preferential tax policies to
the immature investment environment of the past.
Nowadays, China's investment environment is continually
improving, capital is abundant, market entry is broadening and
foreign investors have more financing channels.
The discriminatory policy, if continued, will have negative
effects on the economy and businesses, he pointed out.
Mei also warned that foreign direct investment (FDI) boosts high
growth of exports, but also worsens energy supply, raw material
consumption and environment. Investment from sources chiefly
seeking tax breaks, about one third of total FDI, might increase
pressure on exchange rate appreciation, cause investment
overheating and disturb government macro-control measures.
"The unequal tax policy will undermine domestic enterprises'
operations. They will try to get preferential policies from
government instead of devoting themselves to management and
technical upgrading," said Mei.
Liu Sangxi, vice director of the Finance Science Research
Institution (FSRI), says that it is time for a unified enterprise
income tax. The huge domestic market, cheap labor costs and rapid
economic growth bring huge business opportunities. Foreign
investors are chiefly attracted by the prospect of significant
market shares - tax breaks are a plus, not the reason they're
here.
Instead, China could choose high-quality foreign investors
according to its industrial structure and strategic requirements,
he added.
The Ministry of
Commerce, which is wary of possible FDI withdrawal, holds a
more conservative stance. However, experts believe that tax
unification will have limited impact on foreign-funded enterprises
and their investment in China.
Foreign-funded enterprises are only a small proportion of total
enterprises, and their income tax volume is estimated to be lower
than 20 percent of the total, according to Jia Kang, director of
the FSRI.
A tax expert from PricewaterhouseCoopers said that the strong
reaction of transnational firms is mainly due to psychological
pressure.
Analysis of FDI inflow shows that it is mainly attracted to
China's good economic environment, promising market, human
resources, market system and judicial system, while tax preferences
and policy support are usually the last factors to be
considered.
Tax unification would indicate that the government is striving
to create fair competition and eliminate corruption and power
abuse, opacity and uncertainty, all of which could improve the
confidence of investors.
(China.org.cn by Tang Fuchun February 2, 2005)