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China's corporation tax rates to be unified

People often say China's legislature doesn't matter. Tell that to foreign companies, which will see their tax bill rise by a collective US$5 billion after the nation's lawmakers gather next week.

When the National People's Congress kicks off its annual series of meetings on Monday, one law expected to be passed will unify corporate income tax rates at 25 percent, ending special privileges for foreigners.

"The current tax regimes are too complicated," Finance Minister Jin Renqing (金人慶) said recently.

"A unified tax code will create a taxation environment that favors fair competition among all ventures registered in China," he said.

Or that is the theory at least. Foreigners are cautiously waiting to see what the reality will be.

"The question is whether there will be all sorts of dispensations and cozy arrangements for Chinese enterprises," said a Western executive who asked not to be identified.

The new 25 percent tax rate means foreign enterprises which so far have been subject to a 15 percent income tax will have to pay a combined US$5.1 billion extra every year, according to official calculations.

Chinese companies, meanwhile, will pay US$16.8 billion less, since up until now they have been taxed at 33 percent.

No wonder, then, that Chinese executives such as Lu Honghua, general manager of Changchun Huaxin Food, a candy maker in northeast China, sees the measure as justice finally reigning supreme.

"For us domestic enterprises, the unification of the rates signals that all the enterprises have returned to the same starting point and that all market players are put on an equal footing," Lu told state media.

One often-cited reason for the unified tax rate is China's entry five years ago into the WTO, which says foreigners and locals must be treated equally.

Just as important, however, are changes in the requirements of the Chinese economy now compared with when the dual tax regime was devised.

China is no longer in desperate need of funds. It has more than half a million foreign enterprises, received more than US$60 billion in investment last year, and can start paying attention to other concerns as well.

For instance, China favors more investment in high technology, and sources say the new law will provide a preferential 15 percent rate for companies in that sector.

Companies which currently are entitled to income tax rates of between 15 percent and 24 percent will have five years to adjust.

"We've got similar arrangements in our own countries, but the privilege cannot last forever, and all enterprises know that," said Jorge Mora, China chief executive of French firm Veolia Environment, a provider of environmental services.

"We've benefited from access to these privileges, but we aren't going to stir up a big fuss because we lose this special treatment," he said.
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