The draft Corporate Income Tax Law is now under discussion at the ongoing NPC session, and will be presented for voting on March 16, 2007. A provision of particular interest stipulates the unification or standardization of the rate of taxation at 25 percent, applicable to both domestic and foreign companies. In our special series on the Corporate Income Tax Law, we'll be interviewing NPC deputies, entrepreneurs, industry leaders, and scholars for their take on the proposed unified tax rate, its significance, and potential impact on China's industry and economy. The following is our last piece of this serial interviews, where Prof. Liu Jianwen of Peking University Law School, presents his view. – Editor.
The draft Corporate Income Tax Law reflects a shift in the Chinese Government's focus in relation to foreign investment and industrial development, according to Liu Jianwen, a professor with Peking University Law School, in an interview with china.org.cn that was broadcast alive on the Internet on March 9.
The draft was submitted last Thursday at the ongoing Fifth Session of the Tenth National People's Congress (NPC) for examination. Its main points include: a unified tax rate of 25 percent for both domestic and foreign-funded enterprises; a 20 percent preferential rate for some small low-profit enterprises and 15 percent for some hi-tech enterprises; a five-year transitional period to adopt the new tax rates for certain foreign-funded enterprises; and a standardized policy for actual expenditure deductions.
The new law will guarantee an equal treatment in tax rate, tax deductions and preferences. Domestic and foreign-funded enterprises are both important components of the national economy, so they should have an equal base for competition, said Prof. Liu, adding that such a law complies with World Trade Organization rules and international trends.
Currently, foreign-funded enterprises are governed by the Income Tax Law of the People's Republic of China for Foreign-funded Enterprises, which was adopted at the Fourth Session of the Seventh NPC in 1991, while domestic enterprises are governed by the Provisional Regulations of the People's Republic of China on Corporate Income Tax promulgated by the State Council in 1993.
Domestic companies are subject to an average 25 percent rate of taxation, compared with the 15 percent applicable to foreign-funded enterprises.
"The draft law reflects one major change in government policy and that is the Chinese government will focus more on encouraging energy-saving and environment protection, boosting industrial upgrade and increasing Chinese enterprises' competitive strength in the international market," Liu said.
"Although China will maintain its reform and opening-up policy, the question now is what kind of enterprises China should encourage and introduce."
He pointed out that preferential treatment for all foreign investors does not necessarily benefit national development since the country is in the midst of adjusting its economic structure.
"In view of this adjustment, the Chinese government seeks to develop industries such as hi-tech, infrastructure construction, agriculture, forestry, animal husbandry and fishing through revamped tax policies."
A major change that will be implemented is using industry-based factors as a starting point for decision-making. Supporting factors include regional requirements and the need for government assistance. This is particularly important in the case of smaller low-profit companies.
As enthusiastic as industry leaders have been about the proposed law, Liu pointed out that it is lacking in detail, both in terms of scope and implementation. He reckoned implementation measures would be introduced in July or August this year.
"To ensure its smooth transition, similar provisions in regulations issued by the State Administration of Tax (SAT) and the Ministry of Finance need to be examined, while those that contradict the new law should be eliminated," he said.
The draft law will be put to an open vote on March 16. If approved, it is expected to take effect on January 1, 2008.
Our previous interviews:
More Details Requested of New Tax Law
HK Deputy: Corporate Tax Increases Welcomed
Sichuan Deputy: Tax Cut Good News for Chinese Companies
Standardized Corporate Tax Rates for Level Playing Field
Disabled Deputy: Raise Tax Relief for Donations
(China.org.cn by staff reporter Wang Ke, March 13, 2007)