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WB Economist: Unified Corporate Income Tax to Have Little Effect on Foreign Investment
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China's proposed unified company income tax for domestic and foreign-funded enterprises will have little effect on foreign investment, Bert Hofman, World Bank (WB) lead economist for China, said on Thursday.


The proposed unified tax rate was 25 percent, about the average rate of corporate income tax around the world, Hofman said.


Developed countries in the Organization for Economic Cooperation and Development (OECD) charged on average slightly more and developing countries, notably those with relatively recent tax laws, charged a bit less.


"China's rate seems quite competitive for attracting foreign and domestic investment," Hofman said.


"There is little reason to believe that the new law will have a major effect on foreign investment."


China's top legislature, the National People's Congress (NPC), on Thursday, started examining the draft law on enterprise income tax, which suggests a unified income tax rate for domestic and foreign-funded companies at 25 percent.


Delivering an explanation to the lawmakers, Finance Minister Jin Renqing said the law was drafted to "establish a scientific and standardized corporate income tax system uniformly applicable to various types of enterprises and to create an environment for fair competition".


The rate for Chinese companies is currently set at 33 percent, but tax waivers and incentives are granted to foreign-funded enterprises.


Official estimates show the average tax on foreign-funded enterprises is 15 percent while that on the domestic enterprises is 25 percent.


Many Chinese economists and business leaders have openly criticized the dual standards, which they say are unfair to domestic enterprises.


Chinese officials have explained that the proposed tax rate is mainly intended to ease the tax burden on domestic firms and to minimize the rise for foreign-funded enterprises.


"Foreign investors are of course interested in tax laws, but also in many more things, including the broad investment climate, the domestic market, labor conditions, economic stability, and the like," Hofman said.


"From the surveys we have been doing on investment climates around the world, we know that China's investment climate is quite competitive, with good infrastructure, relatively efficient government bureaucracy, and low labor costs," Hofman said.


Hofman's views have been echoed by many economists from China and international institutions.


China had the competitive advantages in public services, infrastructure, domestic market, human resources, macro economic stability and the like, to lure foreign funds, said Mei Xinyu, an expert with the International Trade and Economic Cooperation Research Institute under the Ministry of Commerce.


The new law would play help to standardize the Chinese market order and enhance the independent sustained development of the national economy, Mei said.


Experts said the tax change was actually a commitment to the World Trade Organization for equal treatment to domestic and overseas investors.


The draft law still has preferential stipulations that encourage investment in energy and resources-saving and environment-friendly projects.


"Such a policy will help improve and upgrade economic structure of China and absorb key technologies," said Peng Longyun, senior economist with the China Resident Mission of the Asian Development Bank.


China's investment climate, public services and various systems had greatly improved over the past 20 years of reform and opening up.


"It's a good time to unify the enterprise income tax," he said.


"This also proves that the government is determined to continue its reform and opening up policies, and work hard to improve investment conditions and climate."


Hofman agreed the law came at a "good time". "Profits are high at the moment, and the disadvantages that were experienced by foreign enterprises in the early days of opening up have by and large disappeared.


"With the passage of the law, China will become more like other market economies, as there are very few countries around the world that have separate tax laws for domestic and foreign enterprises," Hofman said.


Bill Miao, chief of Israel's Tadiran Telecommunications China subsidiary, said the firm regarded the unified tax rate as a resumption of normal status, and "everybody now stands at the same starting point".


"The market potential is what we think about first," Miao said.


He Tong, public relations manager of Nestle (China), said, "For foreign investors, tax exemptions are less important than China's overall environment including the social stability, rapid economic development and low cost labor."


Alex Choi, chairman of Tianjin Aus Circuit Electronic Company Ltd, which has invested US$34 million in the development zone of Tianjin, said, "We came to China not for its preferential tax system, but for its vast market potential and the legal environment which is transparent, fair and standardized."


"The dual income tax standards are unfair to domestic businesses that have to face tougher competition after China entered the World Trade Organization (WTO)."


Ma Jun, a Deutsche Bank economist, said the proposed new tax rate was still low, compared with 28.64 percent charged by 159 countries on average and more than 40 percent in the US and Japan.


The new law would encourage the investment favored by the government by allowing tax breaks for high-technology projects, energy conservation and environment-friendly industries, Ma said.


"This would help create a sound investment environment and promote China's industrial restructuring," he said. 


(Xinhua News Agency March 9, 2007)


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