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Equal Tax Treatment for Foreign Firms

Chinese Finance Minister Jin Renqing said that the country will provide equal tax treatment for domestic and foreign-funded enterprises as the State Council speeds up tax system reform.


Foreign-funded companies now enjoy preferential tax policies than domestic companies, though nominal income tax was the same for both, Jin Renqing told a national meeting on fiscal status in Beijing on Wednesday.


A heavier burden for domestic enterprises is neither conducive to fair play nor in line with the practices of the World Trade Organization, at a time when China's reform and opening-up drive was entering a new stage, he said.


"The current income tax rules for enterprises should be reformed," Jin noted, emphasizing that unified tax rules and policies should be enacted for domestic and foreign-funded enterprises while tax rates were appropriately adjusted.


Jin did not say what the benchmark for a unified corporate income tax rate would be, but analysts predicted it could be around 20 percent of a company's revenue. The tax rate for the state-owned firms is currently set at 33 percent.


Tax reforms coming next year


Meanwhile, Xie Xuren, director of the State Administration of Taxation, said China plans to steadily push forward tax system reforms next year.


"The reforms will include value-added tax (VAT) reforms, tax and fee reforms in rural areas and income tax reforms," Xie said at a national tax working conference in Beijing Wednesday.


China is currently practicing a production-based value-added tax system.


Under this old system, fixed assets are classified as consumer goods and are subject to tax.


As a result, enterprises cannot claim tax deductions for purchase of fixed assets such as equipment and machinery.


The system places a heavy burden on enterprises wanting to increase their fixed-asset investment, especially for capital-and technology-intensive enterprises.


The system thus poses a hurdle to economic restructuring.


Experts have been suggesting for many years that the government should replace the present system with a consumption-based one, which allows companies to deduct such taxes when importing new machinery and equipment.


They also suggest that the new value-added tax system should be expanded to cover more activities currently subject to business taxes such as transportation and telecommunications.


"Starting next year, the new tax system will be implemented in eight industries in the old industrial base in northeast China," Xie said, not specifying the eight industries.


Then, based on the experience gained from this trial tax reform project, the government will implement the system across the country, he said.


Zhang Peisen, a senior researcher with the Taxation Research Institute under the administration, said it is the right time for China to reform its old tax system.


"China's economy has been experiencing a period of stable development and the country's consumer prices have been at lower levels, and these are favorable conditions for the reform," Zhang said.


The Chinese economy will continue to grow at more than 8 percent over the coming several years, while the rise in consumer prices will be at a rate of less than 5 percent up to 2008, he said.


"The stable increase in tax revenues since 2000 has also laid a solid foundation for the reform," Zhang said.


The country's tax revenues, which have grown from 250 billion to 300 billion yuan (US$30.1-36.1 billion) a year since 2000, will continue to grow at a rapid pace in the coming years, he said.


China's tax revenues this year, excluding tariffs and agriculture taxes, rose a year-on-year 20.9 percent to 1.98 trillion yuan (US$239 billion) by December 20, figures from the State Administration of Taxation indicate.


"Tax revenues are likely to surpass 2 trillion yuan (US$240 billion) for the whole of the year, representing an increase of more than 300 billion yuan (US$36.1 billion) over last year's figures," Xie said.


Next year, China will deepen tax and fee reforms in its rural areas to further reduce the financial burden of farmers, he said.


With the exception of taxes on tobacco, the government will eliminate taxes on special agriculture produce across the country, Xie said.


The government will lower the average agriculture tax rate, which stands at about 8.4 percent now, by 1 percentage point next year, he said.


"In areas where conditions are ripe, agricultural taxes could be reduced further or be eliminated," he said.


The government will also make full preparation for the reform of the enterprise income tax law and personal income tax law next year.


According to Zhang, since China has become a member of the World Trade Organization, the country should unify its enterprise income tax policies.


The country is now practicing separate enterprise income tax policies for domestic and foreign-funded companies.


The income tax rate for domestic companies is 33 percent, while that for foreign-funded companies is only 17 percent.


"The country should implement the same treatment for foreign-funded and national companies, so that they compete on an equal footing," he said.


In recent years, personal income tax has become a hot topic, because the tax-free income level, which stands at 800 yuan (US$96), is considered to be too low.


Present personal income tax rates are divided into 11 categories based on income sources, and is only loosely related to an individual's total annual income.


Taxation is aimed at people with high-level incomes to promote economic development and social stability.


As a result, the current 800-yuan (US$96) starting point for taxation on monthly income needs to be raised.


(China Daily December 25, 2003)

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