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End of Tax Breaks for Foreign Companies

Foreign investors will pay the same rate of corporate income tax as their Chinese competitors from 2007, according to a senior expert.

Jia Kang, president of the Institute of Fiscal Science under the Ministry of Finance, revealed that China's highest decision-making body had reached a decision on the long-awaited timetable for levying a unified corporate tax on domestic and overseas-funded firms.

"The decision-making body has reached a common ground to speed up taxation reform. And the timetable is reliable," Jia told China Daily during a forum over the weekend on China's investment climate held in Jiangmen, Guangdong Province.

To lure foreign investment, the Chinese government has been offering overseas investors preferential tax rates since the mid 1980s.

The average corporate tax rate for domestic companies is 33 percent while foreign firms pay only half that. Statistics show that foreign enterprises get an annual tax break of approximately US$50 billion in China.

Jia did not reveal what the unified rate might be but earlier forecasts have suggested 24 or 25 percent.

Jia said China has to unify the tax code to cater to the new business environment brought about by China's entry to the World Trade Organization in 2001 as well as encourage fair competition among all businesses.

"Our goal is to treat every investor equally, whether local or foreign, private or State-owned," said Jia.

Following the unification of the nation's tax policies, Jia said foreign-funded firms would be given a five-year transition period, which means investors entering the country before 2007 can take advantage of the current tax break until the end of 2011, but firms coming into the country after 2011 will be levied with the new tax as soon as they start doing business.

Jia dismissed concerns rife in business circles that foreign direct investment would slump if the preferential tax policy were scrapped.

"I don't think so because the income tax rates for some sectors are still attractive and low," said Jia.

Partly due to the tax breaks, China had attracted a total of US$562.1 billion in foreign direct investment by the end of 2004 and approved the establishment in the country of more than 500,000 foreign-funded enterprises.

US-based urban planning company JAO Design International is among them. Its CEO James Jao said reform of the current system would create a competitive environment for both domestic and foreign investors.

But, he said he hoped the government continues to offer tax advantages to some industries after the single tax policy takes effect.

And the government's efficiency and transparency will have a major impact on the country's use of foreign investment, said Jao.

(China Daily May 30, 2005)

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