At a symposium at the end of August, the first
Sino-US high-level one on tax law, experts discussed the
equalization of corporate tax rates for domestic and foreign-funded
firms, with many believing it was inevitable and desirable despite
opposition from foreign-funded companies.
Tang Gongliang, a Central University of
Finance and Economics professor, told attendees China now has a
relaxed financial environment and has the money to fund such a
reform and the resultant reduction in tax income.
Yu Guangyuan, a member of the Standing Committee of
the National People's Congress (NPC),
said at the event that in China foreign-funded firms enjoy many
preferential tax policies not available to domestic companies.
Different tax rates for domestic and foreign-funded
firms violate the principle of fairness in taxation and are not
conducive to fair competition, said Yu, and also affect the
efficiency of tax administration.
The symposium was organized jointly by Peking University's Finance and
Economic Law Research Center, the State Taxation Administration's
Taxation Science Research Institute and the International Tax Law
Research Association.
To lure foreign investment, the government has
offered overseas investors preferential tax rates since the mid
1980s. Currently, the average tax rate for domestic companies is 33
percent while that for foreign firms is 15 percent.
The Ministry of
Finance sent a draft to the State Council in August 2004 to
equalize corporate tax rates, proposing a unified rate of around 24
percent. Certain tax breaks would still be given in specific
industries and regions, but Chinese and foreign-funded firms would
be treated equally. Foreign-funded firms would also be given a
five-year transitional period.
Fifty-four transnational companies, including
Motorola, Nokia, GE, Siemens, Samsung and LG, made a joint
submission to the government early this year to demand further
prolonging the preferential tax policy for five to ten years.
Lou Jiwei, vice minister of finance, said in mid
January that it was inappropriate to grant foreign-funded firms
preferential treatment now that China is enacting WTO reforms.
Mei Xinyu, a Ministry of Commerce (MOFCOM) researcher, said
preferential treatment has weakened the competitiveness of
domestic-funded firms, impeding technical upgrading, industrial
structure optimization and their attraction to new talent.
Mei said that in recent years many auto companies
have reduced staff and even dismantled research and development
departments in order to launch joint ventures with foreign
companies to qualify for preferential rates.
The policy also resulted in domestic capital
flowing out and then back into China as overseas capital for the
same reason, Mei added.
The MOFCOM told a press conference in July that a
preferential tax policy is especially important while foreign
direct investment (FDI) inflow is declining. China attracted US$38
billion in FDI from January to August, down 3 percent year-on-year,
according to the ministry's website.
Lu Jinyong, a University of International Business
and Trade investment researcher, said these are short-term
decreases: "Actually, a decline is natural after the great increase
last year." FDI increased over 13 percent in 2004 on the previous
year.
Mei cited the OECD report Trends and Recent
Developments in Foreign Direct Investment to say that a
preferential tax policy is not the decisive factor in attracting
FDI.
The report said overseas investors chose locations
not only based on low costs but on market size, and that relaxation
of policy control and surveillance and great changes in global
trade all affect the flow of FDI.
Experts at the symposium said that, as long as
China improves its macro economy and investment climate and holds
clear stances to attract foreign investment, it will still be a
magnet for global FDI.
According to Stockstar.com on September 5, the
Ministry of Finance has proposed a compromise to be submitted to
the NPC for deliberation in 2007 at the earliest. In this,
foreign-funded firms would still be given certain preferential tax
treatment based on an equalized tax rate.
(China.org.cn by Yuan Fang, October 8, 2005)