The Chinese government will allow "a reasonable transitional period" to help foreign-funded companies adjust to a new tax system that scraps their privileges of more than 15 years.

Vice Minister of Commerce Ma Xiuhong broke the news on Thursday while answering questions related to the standardization of corporate income tax systems for both domestic and overseas-funded firms.

In August, a draft company tax law will be submitted to the Standing Committee of National People's Congress for preliminary examination, said Wang Jianfan, deputy director of the Taxation Department of the Ministry of Finance.

If approved by the legislature, the tax rate will be unified for all companies -- the tax rate for domestic companies has been twice as much as that for foreign companies for more than a decade.

Officials have declined to give a timetable, but some legal experts held that the law could possibly become effective in 2008.

"The changes will surely affect the operation of business. The government will allow a reasonable transitional period for foreign-funded companies to secure a steady move from two parallel tax systems to one," Ma said.

She said a single standard company tax system was required for the country's ongoing economic reform and would facilitate the development of the market economy.

"China has already established a socialist market economy highlighting fair competition. Chinese companies have learned to thrive in such an environment," Ma said.

Although concerns of a slow-down in foreign direct investment remain, the government has accelerated the standardization of taxation this year.

Calling preferential tax policies "petty favors",  Lu Zhongyuan, of the Development Research Center of the State Council, said the business environment and market potential were more influential in attracting foreign investment to China.

He said the real handicap was local officials who feared the removal of tax privileges would lead to a weaker foreign direct investment inflow and fewer achievements to their credit in their political careers.

Ma Xiuhong acknowledged the positive role that preferential taxation had played in attracting foreign investment, technology and expertise.

"While standardizing the corporate tax systems, we will stick to the principle of lowering tax rates and tightening control of tax collection."

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