Lawmakers listen to an explanation
about the draft Property Rights Law that grants equal protection to state
and private properties in the Great Hall of the People March 8, 2007.
China yesterday formally proposed a unified corporate tax for overseas and
domestic companies by submitting a draft law to the top legislature, the
National People's Congress (NPC), during its ongoing annual session.
Under existing corporate income tax laws, domestic companies pay 33 percent
income tax, while overseas-funded firms pay 15 percent, which some economists
say comes down to 11 percent after the many tax breaks they get. The proposed
law aims to impose a flat 25 percent tax on both, and provide them with a level
NPC deputies are scheduled to vote on the tax bill on March 16, the last day
of the session, and if passed, the law will become effective from next year.
Economic and legal experts welcomed the move, saying the draft corporate tax
law was a sign of major progress in the country's way of attracting overseas
A unified corporate income tax will promote fair market competition, China
University of Politics and Law's senior law professor Li Shuguang said. The
separate tax rates are against the World Trade Organization's principle of fair
and equal treatment.
And even after the change, China's overall corporate income tax would not be
high compared to other economies either in the region or across the world, Li
In fact, Minister of Finance Jin Renqing told NPC deputies yesterday that the
25 percent rate was lower than the average tax rate in 159 economies that had
adopted a corporate tax regime and the average rate levied by 18 neighboring
After the enforcement of the new law, the finance ministry expects domestic
firms to pay 134 billion yuan ($17.3 billion) less in taxes every year and
overseas companies, 41 billion yuan ($5.3 billion) more.
Overseas firms, however, will enjoy a five-year grace period, during which
the new tax rate will be phased in. "This will minimize the impact on overseas
firms," Li said.
With a unified tax, China will no longer seek overseas investment by offering
extra financial incentives as it had done for the past two decades. Instead, it
will offer a more competitive business environment, including the rule of law.
Having two sets of tax rates was a necessity for the country in the early
days of its economic reform, said Lin Yifu, leading economist and member of the
Chinese People's Political Consultative Conference (CPPCC) National Committee,
the top political advisory body.
China used the tax incentives then to attract investors from abroad because
it had to build its market environment and suffered from a considerable lack of
capital and foreign reserves, he said.
But the country has taken great strides on the economic front since then, and
its market condition and capital reserves today are strong. "As a natural
result," he said, "the time is ripe to have a unified tax system."
A lower tax rate does not sustain investor confidence, rather a stable
market. Ample human capital and healthy market potential are needed for that,
Peking University's senior economist Li Yining corroborated Lin, saying:
"Foreign investors will consider multiple factors such as the investment
environment and market potential. I believe they will increase their investment
after the tax rate is adjusted."
The tax law reform reflects China's efforts to build a consistent system to
guarantee the stable and sound development of its market economy.
Foreign investors have long complained against China's "disorderly and
changeable" policies. Now the country is using the law to have an all-binding
tax across the nation, Li Shuguang said. "It actually is good news for foreign
investors because China is building a rule-based economy."
The proposed law also stipulates a series of tax breaks to promote
high-technology, environmental protection and energy-saving industries.
Wu Jiao contributed to the story
(China Daily 03/09/2007 page1)