Unified corporate tax has multiple benefits
(China Daily)
Updated: 2006-03-08 06:04

The logic behind a new law that will unify income tax rates for all companies lies in the country's urgent need for a level-playing field to underpin sound and sustainable economic growth.

Worries about the impact of the amendment of the Corporate Income Tax Law on the nation's finances and opposition from foreign firms are all justified considerations.

But still, lawmakers and political advisers who are gathering in Beijing now should do their best to accelerate such a legislative move.

The debate on corporate tax law has lasted too long.

If a bill is tabled to the national legislature soon and passed in a speedy way, as some experts believe will happen soon, domestic enterprises can begin to enjoy taxation parity with foreign companies as early as in 2008.

That means even after China has fulfilled most of the promises made upon its entry into the World Trade Organization like granting foreign investors equal access to many domestic sectors, home-grown companies will continue to be taxed unfavourably.

Surely, this is one of the last scenes the Chinese Government would like to see.

During the past two decades of reform and opening up, one thing that Chinese policy-makers have firmly stuck to is to try every means to raise the efficiency of the national economy. A healthy market environment that encourages fair competition is a must to achieve that goal. Unequal taxation will only undo the country's efforts to level the market.

Historically, different corporate income tax codes for domestic and overseas-funded firms have served well in attracting foreign investment, technology and expertise.

Not to mention the nominal gap in income tax rates that could be as large as 18 percentage points, foreign companies in China have on average enjoyed an actual income tax rate about 10 percentage points lower than that of domestic firms in the past decade.

Such a preferential tax policy was aimed at compensating the risks foreign investors took to venture into a developing economy that was just beginning to integrate itself with the world economy.

That China has outperformed all other developing countries in absorbing foreign direct investment for a number of years testifies not only to the huge potential of its domestic market but also its improved business environment.

Therefore, it is reasonable to gradually restore taxation parity among all types of enterprises in the country.

Understandably, the unified tax rate will fall between the 33 per cent level for domestic businesses and the 15 per cent level for foreign companies.

A tax cut for domestic firms, who account for the majority of corporate taxpayers, will definitely make a dent in the national coffers. Yet, with the country's tax revenues surging by 20 per cent a year, there is no reason for tax authorities to procrastinate.

Do not take for granted the double-digit tax growth in recent years that can help cushion the impact of a tax cut. It will slow sooner or later.

Besides, an expanding tax base as a result of the country's rapid economic growth will only add to the cost of the tax cut.

For officials handling the complaints by foreign companies about the end of preferential tax, it is important to clarify the purpose of the legislation.

A unified corporate income tax system represents no less hospitality to foreign investors.

Instead, it signals that the country is more confident about its market appeal. China is ready to offer all businesses an equal taxation footing to prosper together with its economy.

(China Daily 03/08/2006 page4)

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