China to scrap foreign tax breaks

Beijing, Nov 16 | Updated: Nov 18 2005, 03:40am hrs
China is preparing to scrap a two-decade-old taxation policy that gives foreign companies preferential treatment, something that will happen soon, finance minister Jin Renqing said on Wednesday. Foreign firms enjoy income tax rates as low as 15% while domestic firms are typically taxed at 33%, and calls among economists for ending the practice have risen in recent months.

Its inevitable that the tax rates on foreign and domestic companies will be unified, Mr Jin said at a business forum. Currently, we are conducting research and designing the tax systems and I believe it will not be very long before the unification is implemented.

Mr Jin also said the government was considering implementing a consumption -oriented fiscal policy and pledged to take appropriate steps to spur consumer spending. China had long pondered ending preferential tax rates for foreign-funded firms. But analysts say reforms have progressed slowly because of resistance from local officials hungry for foreign investment.

Beijings resolve to end the tax breaks has firmed up because adherence to WTO rules is depriving domestic companies of some of their advantages, while economists have cited inflow of foreign investment as a key driver of Chinas surging exports, that exert upward pressure on the yuan.

State media said China arrived at the decision to unify tax rates for domestic and foreign firms from 2007 to create a fairer market, with a unified rate expected to be set at about 25%. But the official China Securities journal said on Wednesday the tax unification was unlikely to be implemented before 2007 as the revised law would still need approval from parliament.

The newspaper quoted Chinese experts as saying that the unified tax rate would be around 24%, but foreign companies would be given a transitional period of 5-10 years.