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China to phase out tax breaks for foreign firms

Foreign investors who set up shop in China after 2007 will face a steep increase in corporate tax, as the government enforces rules to make everyone pay the same rates, state media said yesterday.

Foreign companies that arrive in China before 2007 will be given a five-year transition period to gradually adjust to the higher rates, the China Daily reported.

Equal treatment

"Our goal is to treat every investor equally, no matter if they are from home or abroad, private or state-owned," said Jia Kang, president of the Institute of Fiscal Science under the Ministry of Finance.

This will mark the end of preferential tax rates that Beijing has offered since the mid-1980s to lure foreign investment.

On average, the income tax rate for domestic companies is 33 percent while foreign firms only pay half that, the paper said.

It did not mention that many well-connected state enterprises are also believed to get away with paying much less than they should.

Statistics show that foreign enterprises get an annual tax break of approximately US$50 billion in China.

Jia did not reveal where the unified rate will be set but earlier forecasts suggested a 24 or 25 percent level.

China has to unify the tax code to cater to the new business environment brought about by China's entry to the WTO in 2001 as well as encourage fair competition among all businesses, Jia told the paper.

Still attractive

Jia dismissed concerns rife in business circles that foreign direct investment would slump if the preferential taxes were scrapped.

"I don't think so because the income tax rates for some sectors are still attractive and low," Jia said.
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