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Experts: Reform Won't Shrink FDI
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China's proposed unification of corporate income taxes will not cause any loss of foreign investment in China, experts in Beijing said.


The comments come hot on the heels of a meeting of the Standing Committee of the National People's Congress (NPC), which met over the weekend to discuss a bill that would reform the corporate income tax regime.


According to the draft law, the country will unify income tax rates for domestic and foreign companies at 25 percent. Chinese domestic companies currently pay 33 percent income tax, while foreign companies, which benefit from tax waivers and incentives, pay an average of 15 percent.


"We believe the tax unification will not result in big decreases in foreign investment in the country," said Hu Yanni, an analyst with China Securities Research of CITIC.


Experts believe that the preferable tax regime is just one of the factors that attract foreign investment while the key issues in China should instead be abundant human resources, social stability and an irreplaceable market.


Looking at long-term development in China, most foreign-funded enterprises are not expected to shift their investment strategy in China, said Lu Jinyong, an investment researcher at the University of International Business and Economics.


He explained that foreign companies were granted some favorable treatment when they faced some investment restrictions in China in terms of industries and share of stake.


"But it is inevitable that they be treated equally, given that China has opened nearly all of its market to foreign players by the fifth anniversary of the country's WTO accession."


"The reform of the corporate income tax is expected to optimise China's investment environment," he said. "The revised tax rate will put all market players, both domestic and foreign, on an equal footing."


Hu added that the regulations will be phased in over a five-year period, meaning that foreign investors still have another five years to adapt to the changes.


If the bill is adopted by the NPC plenary session in March 2007, it is expected to take effect in 2008.


Meanwhile, foreign-invested companies could enjoy a preferable 15 percent income tax rate in some high-tech sectors.


The country's policies encouraging foreign direct investment (FDI) focus more on quality than quantity, experts said.


The government intends to attract more technologies than capital from foreign investors. The hope is that service industry enterprises and research and development centres will boost the development of domestic industries.


Elizabeth Knup, governor of AmCham China, told China Daily in early December that while the inflow of FDI might not drop, its distribution would probably change. He believes that the reform would redirect much FDI from manufacturing sectors to service sectors and mergers and acquisitions.


The proposed 25 percent tax rate is low compared to most other countries. Statistics show that the average corporate income tax rate in 159 foreign countries and regions was 28.6 percent last fiscal year.


The final result depends on a set of detailed regulations to implement the draft bill, which is expected to be developed by the State Council.


Generous tax incentives for foreign enterprises have fuelled foreign capital inflows into China, but the dual income tax structure also spurred domestic enterprises' calls for rights similar to their international counterparts.


Finance Minister Jin Renqing openly called the current tax regimes 'too complicated,' saying that 'a unified tax code will create a taxation environment that favours fair competition among all ventures registered in China.'


The unification of income taxes is not expected to result in severe FDI losses, but the reform is likely to reduce the inflow of "fake FDI," which is money that flows out of China before returning disguised as foreign investment.


China has been one of the world's top destinations for FDI. It received inflows totalling US$53.5 billion in 2003, US$60.6 billion in 2004 and US$60.3 billion in 2005.


However, looking at top foreign investment sources shows that the British Virgin Islands and Cayman Islands ranked among them for several years.


"Although investors from some other countries registered there to take advantage of low taxes, quite a number of them are Chinese business people," Lu said.


Fake FDI is estimated to be around 10 percent of the total actual foreign investment in China. The abolition of favorable treatment for foreign investment is expected to reduce the percentage of fake FDI.


(China Daily December 26, 2006)


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