| Time for unified business tax |
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| Thursday,March 17,2005 Posted: 12:30 BJT(0430 GMT) |
A discussion is under way among legislators about revising legislation, and levying a uniform income tax, on domestic and foreign invested enterprises.
The different treatment currently given to the two kinds of firms originates from two legal texts: The first is the Provisional Regulations of the People's Republic of China on Enterprise Income Tax, promulgated by the State Council in 1993; the second is the Law of the People's Republic of China on Income Tax for Enterprises with Foreign Investment and Foreign Enterprises, adopted by the fourth session of the Seventh National People's Congress in 1991.
The former deals with income tax for domestic enterprises while the latter deals with businesses with foreign investment or of foreign ownership.
The nominal rate of income tax for domestic enterprises is 33 per cent and that for foreign business is 30 per cent in general and 15 per cent in special economic zones.
The actual rate drops to 22 per cent and 11 per cent on average respectively when tax reduction features and other exemptions are included.
As the country marches towards a market economy as part of economic globalization, one of the strategic issues to be settled is how to provide a level playing field for all firms that compete against each other. This became a more pressing issue after China became a member of the World Trade Organization (WTO) more than three years ago.
It is against WTO rules to grant special treatment to foreign investors. Domestic enterprises should receive the same treatment as their foreign counterparts, or they will be pushed into a disadvantaged position in the long term, no matter whether they are State-owned or private.
Laws and regulations that contradict WTO rules still exist, with the two legal texts concerning business income tax among them.
As Jin Renqing, minister of finance, said at the recent annual meeting of the Chinese Society of Fiscal Science, the time is right to unify income tax rules without further delay.
Actually, this unification is not something that cannot be achieved.
Launched in 1991, the Law on Income Tax for Enterprises with Foreign Investment and Foreign Enterprises was in line with market practices. The stipulations in this law about taxable income, taxable costs and other terms accord with international practice.
If the income tax is to be unified, stipulations in the 1991 law could still apply with minor adjustment.
Although this unification, if national companies paid the same as international ones, would result in a reduction in the government's income for a while, the continuous growth of the economy in recent years will allow the State to withstand this.
The net increase in tax revenue amounted to more than 500 billion yuan (US$60.2 billion) in 2004, which makes this year a good one to unify the various tax codes.
Currently, domestic and foreign businesses are subject to the same rules in certain areas. For example, Chinese citizens and foreigners living in China enjoy the same individual income tax rate.
It is now time to begin unifying income tax rates as a lot of preparation work has already been done.
The biggest obstacle to unifying the tax codes is how to settle the tax reduction and exemption status enjoyed by foreign invested and foreign-owned businesses.
Opinions are divided on which of these favourable treatments should be cancelled, which should be retained and for how long they should be retained.
It is common for a country to have to modify favourable tax rates after entry into the WTO because of possible adverse impacts on domestic businesses, especially small- and middle-sized ones.
It is natural for China to follow suit, though tax reductions and exemptions for foreign invested businesses would still remain.
What will be altered is the means of granting this treatment.
In most countries, businesses in sectors whose development is encouraged by the government, like high-technology, can get tax breaks. Tax reduction for businesses in other sectors is removed regardless of their ownership.
The authorities should outline the principles of favourable tax treatment in the new document which is to replace the two pieces of enterprise income tax legislation.
The details about the new taxation should be mapped out by administrative rules, so that they can be adjusted to suit changing circumstances.
The new document should allow a transition period of three to five years. During this period, existing foreign-invested and foreign-owned businesses should keep their tax reductions and exemptions.
The transition period will serve as a buffer against instant shocks for foreign investors and their businesses.
The new rate of enterprise income tax should be set at 24 or 25 per cent, which will be close to the average tax rate for domestic and foreign businesses.
The unification of this area of income tax will not have a remarkable impact on the efforts to lure foreign investment, nor will tax revenue see huge reduction in the long run.
The Ministry of Finance, the State Administration of Taxation, the Ministry of Commerce and the Legislative Affairs Office under the State Council should sort this out too.
Other necessary arrangements should also be made to facilitate the unification of these tax codes as early as possible.
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