Unified corporate tax to balance interests
By Xu Binglan (China Daily)
Updated: 2006-01-18 06:19

The concerns of domestic enterprises and the need to continue attracting foreign investment will be taken into consideration while formulating a unified corporate income tax, a top tax official said yesterday.

Foreign companies operating in China enjoy a preferential tax rate as low as 15 per cent, compared to 33 per cent for Chinese firms.

A resolution at the Fifth Plenary Session of the 16th Congress of the Communist Party of China last year decided to unify the two systems.

The State Administration of Taxation (SAT) will balance domestic firms' demand for a level playground and concerns that abolishing the preferential tax rates could slow down the influx of foreign capital, Wang Li, deputy director of SAT, said.

"We are consulting and working with related departments on this issue," Wang told a press conference hosted by the State Council Information Office.

On nationwide reform of the value-added tax (VAT) system, Wang said feasibility studies by financial authorities are under way.

A pilot project on VAT reform started in 2004 and is progressing "steadily" in the three northeastern provinces of Heilongjiang, Jilin and Liaoning, he said.

But Wang did not give a timetable for the implementation of the much-anticipated tax reforms in the two areas.

According to international custom, enterprises' expenditure on fixed-asset investments is deducted from the amount taxed, but China did not adopt this practice when the current VAT system started in 1994, mainly to deter overheated investment then.

In recent years, both the government and enterprises have felt the need to change the law so that enterprises are not overtaxed.

The country's high tax revenues were another issue addressed at the press conference.

In many countries, the annual growth rate of taxes is roughly 3 percentage points higher than GDP growth but in China the difference is much bigger.

The country's GDP was estimated to have grown 9.8 per cent last year, but tax revenues rose by 20 per cent.

SAT Director Xie Xuren explained that a major reason was that tax growth rate was calculated at current prices and economic growth rate at comparable prices.

"If calculated at current prices, the GDP may have grown by 13 to 14 per cent last year," he said.

In addition, taxes are mainly collected from industries and services, which grow faster than GDP; but the size of the economy also covers such slow-growing sectors as agriculture which is why the tax growth rate could be higher than GDP growth, Xie said.

Trade is also a factor: While foreign trade contributed to GDP growth with a trade surplus, its share in tax revenues is high because an overwhelming majority of imports are subject to tariffs.

(China Daily 01/18/2006 page2)