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Preferential Tax Breaks for Foreign-funded Firms to Continue
Preferential tax breaks enjoyed by foreign-funded firms in China are set to continue, at least for the immediate future, Director Jin Renqing of the State Administration of Taxation said in Beijing yesterday.

"We are still studying the issue, because it is extremely important," Jin told reporters.

He said: "We have to be very prudent and give careful consideration to the issue. And we have to choose a good time to introduce a unified enterprise income tax policy for business."

China currently operates dual-track enterprise income tax policies in respect of domestic and foreign-funded companies.

The tax rate for domestic companies is 33 per cent, while that for foreign-funded companies is 17 per cent.

For many years, tax experts and domestic entrepreneurs have called for an end to these tax incentives which, they argue, prejudice domestic firms .

"It has become more urgent for the country to have a uniform system of enterprise income tax policies now that China is a member of the World Trade Organization (WTO)," said Zhang Peisen, a senior expert with the Taxation Research Institute under Jin's administration.

Jin, however, confirmed there was no timetable for the implementation of a new tax policy.

"We will honour the promises of those incentives granted to old foreign-funded companies and give full consideration to those companies' interests," he said.

The unification of income tax policies should be in line with WTO requirements and be beneficial for furthering the development of China's opening-up, the utilization of foreign investment and enhancing of the competitiveness of domestic companies, he said. But he added that China is considering a new tax rate.

"The rate should be acceptable to both domestic and foreign-funded companies," said Jin.

Zhang Peisen suggested that the new enterprise income tax rate could be set at 24 per cent and the pre-tax deduction be made uniform.

Ni Hongri, a senior research fellow with the Development Research Centre under the State Council, said tax incentives (for foreign-funded companies) have played an important role in attracting overseas investment at a time when the Chinese market was not open enough.

Although the preferential policies led to a serious loss of tax income, the end result was more advantages than disadvantages, because the incentives co-existed with non-tax trade barriers, such as higher tariffs and import quotas enjoyed by domestic companies, said Ni.

However, now that China is a WTO member, the country will have to gradually remove trade barriers, she added.

In the meantime the country will continue to open more sectors, including banking, insurance, telecommunications, trade and tourism to foreign investors.

It will also provide an improved market system, one that includes a more complete and transparent legal system, more open markets and more efficient administrative practices.

This more open market requires an equitable tax environment for domestic and foreign-funded companies so that they can compete on a level playing field, she said.

(China Daily January 15, 2003)

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