Under the vigorous lobbying campaign of foreign-invested enterprises (FIEs), China announced in mid-March 2005, that it would delay, for further study, a plan that would unify differing corporate income-tax rates for foreign and domestic companies and push foreign manufacturers into a higher tax bracket.
The State Administration of Taxation has not yet specified the duration of the delay. No tax-unifying plan has been submitted to the national legislature for approval this year, but it is widely expected that a plan will be implemented no later than 2008.
Taxes are an increasingly important factor for foreign companies operating in China. Foreign manufacturers in China currently pay 15% tax, much lower than the 33% assessed on domestic companies. (1) Though the actual income tax burden on the two types of businesses may not differ as much as the nominal income tax rates indicate, many believe this tax gap alone poses a disadvantage to domestic players who face intensified competition.
Preferential tax policies set China on course for sustained growth in foreign direct investment. Last year alone, China registered a record actual foreign direct investment (FDI) of US$60.6 billion, second only to FDI in the U.S. By last September, China’s aggregated contracted FDI had exceeded US$1 trillion. Resulting from a rapid growth of the national economy, China’s tax revenue, excluding tariffs and agriculture tax, reached US$310 billion in 2004, a 25.7% increase from previous years. (2)
China’s preferential treatment of foreign companies, although consistent with its World Trade Organization commitments in dismantling domestic barriers, seems increasingly outdated and unnecessary. A unified tax code would place domestic businesses on equal ground with multinationals.
China’s anticipated plan will unify the income tax rate for both domestic and foreign manufacturers with a fixed rate somewhere between the current nominal rates of 33% and 15%, most likely at 24%. Preferential tax policies will be granted by region and industry according to the country’s development strategy.
Since the new tax rate for domestic companies, which constitute the majority of the tax base, will substantially decrease, the overall amount of corporate income tax collected will likewise decrease after unification. But, the growing fiscal surplus and growth momentum of China’s tax revenue have convinced tax and financial authorities that despite the loss, they can afford a unified income tax rate.
For further information regarding corporate tax issues in China, please contact Richard Johnson at rjohnson@kmclaw.com or Michael Chen at mchen@kmclaw.com.