Foreign firms in China get a tax-cushion period

Foreign companies in China will get at least a five-year cushion period to adjust to new rules that will eventually make them pay the same tax rates as local rivals, state media reported yesterday.

The government may extend the period to six or even eight years as it unifies tax regimes for local and foreign companies, Xinhua news agency said, citing Jia Kang (賈康), head of the finance ministry's Institute of Fiscal Science.

Long way off

This means that it could be halfway through the next decade -- or 14 years after China's entry into the World Trade Organization which originally forced the rule change -- before foreign and local companies pay the same rates.

Jia quoted by Xinhua as saying government agencies are trying to reach consensus on unifying the tax law, with a tentative timetable for its implementation beginning in 2007 at the earliest.

He said different interests of various government authorities are the major obstacle in unifying corporate income tax rates for domestic and foreign firms.

One tax

Jin said last week the harmonized tax rate would likely be about 25 percent on all companies, compared with the current 15 percent corporate tax for foreign-invested companies and 33 percent for their domestic counterparts.

He said the new tax regime would not mean the end of preferential taxes for foreign invested companies, saying support for enterprises in compliance with industrial policies "would continue and may even improve."

Although foreign companies officially appear to pay much lower rates than local enterprises, the real situation may be more complicated on the ground.

Well-connected Chinese companies are widely believed to be paying rates considerably below the official level.