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The unification of the corporate income tax rate for local and foreign-funded companies will be a positive for the A-share market in 2007.

 

The corporate tax unification bill is likely to be passed by the National People's Congress in early March and would be effective from January 1, 2008.

 

For domestic firms, the tax rate will be cut from the current 33 percent to 25 percent, while for foreign-invested companies, the tax rate will rise from the current 15 or 24 percent to 25 percent over a five-year transition period. The new tax system will be based more on sectors than regions.

 

Analysts pointed out that there would be an average 6 to 8 percent overall net profit gain for A-share companies. And over the three- to five-year phase-in period, the gain would rise to 9 percent.

 

This provides a positive outlook for institutional investors on the performance of listed companies.

 

Banks, telecom companies and the food and beverage industry will benefit the most from the new tax policy, according to analysts. The average net profit of the banking sector is expected to increase by over 10 percent with the new tax policy.

 

"The tax reform is especially positive for banks, as a bank will see a 1.5 percent profit gain for a 1 percent tax cut. Since banks' income tax will be cut from 33 percent to 25 percent, there will be a profit increase of as much as 12 percent," said Ling Xuewen, an analyst with a stock consultancy firm based in Guangzhou.

 

Banks such as the Industrial and Commercial Bank of China (ICBC), Bank of China (BOC), China Merchants Bank, and the Pudong Development Bank are among those that will benefit in 2007 under the preferential tax policy.

 

News that the Chinese government is expected to pass the unification of corporate tax bill in 2007 triggered positive market sentiment in late December.

 

Shares in banks such as the ICBC and BOC increased by 65 and 50 percent respectively in December.

 

Meanwhile, the profit of companies in traditional industries such as iron and steel, coal, papermaking, and non-ferrous metals will also benefit from the tax cut.

 

Companies such as China Unicom, Wuliangye Group Co Ltd and Kweichow Moutai Co Ltd will be highly sought after in the stock market.

 

As the new tax system will be based more on sectors than regions, high-tech companies, especially biotech and aerospace firms, will benefit from continued preferential tax rates.

 

Preferential rates will also be granted to sectors such as shipbuilding, equipment and machinery sectors, banks, insurance, logistics, and traditional labor-intensive service sectors.

 

Companies like Guangzhou Shipyard, Dongfang Electric, Shanghai Electric, Harbin Power and China Infrastructure Machinery will be winners under the new tax policy.

 

But prospects are less optimistic for companies located in the High-tech Development Zone that belong to traditional industries. These companies currently enjoy a 15 percent preferential corporate income tax. But when the preferential tax is canceled, their future profit is likely to be squeezed.

 

The future is less clear for property developers, as it is difficult to predict whether they will benefit from the new tax policy.

 

And while investors focus on the unification of the corporate income tax rate, the government also plans to abolish some fees.

 

"This means not all of the positive news has been factored in by the market," according to a Merrill Lynch report.

 

In addition to the expected tax rate cut, fees charged by the government will be abolished, including city construction and education fees that account for about 3 to 5 percent of domestic firms' tax bills.

 

But this change will have no impact on foreign-invested companies, which do not pay these fees.

 

(China Daily January 5, 2007)