Unified China Company Tax to Hit Few Foreign Firms

Unification of China's corporate income tax rates will not have a big impact on inflows of foreign
direct investment because some sectors will still enjoy preferential rates, Finance Minister Jin Renqing said on Friday.

The draft corporate income tax law expected to be passed by the parliament next week proposes a unified rate of 25%. Domestic firms now generally pay 33%, while foreign ones pay as little as 15 percent, meaning the new law will end decades of special treatment for foreigners.

However, the law also proposes granting a preferential rate of 15% to high-technology firms and one of 20% to smaller companies with thin profit margins.

"When you take away those two types of firms, I think the number that actually see their tax rates go from 15% to 25% will be very limited," Jin told a news conference during the annual session of the National People's Congress, China's largely ceremonial parliament.

Jin also said that because the law would grant a five-year phase-in period from the time it is implemented at the start of next year, foreign firms' tax bills would increase only gradually, by 2 percentage points a year on average.

While foreign firms would see their annual tax bill increase by 43 billion yuan ($5.6 billion) by the time the phase-in period had ended, the additional charge in each of those five years would probably only be around 8 billion yuan, he said.

Jin was clarifying an estimate he made on Thursday in his report to parliament, in which he said that foreign firms would pay 41 billion yuan more in income tax when the law was implemented in 2008.

That would probably also mean that the government would see a sharper drop in revenues in the first years after the law's implementation than the 93 billion yuan a year that Jin estimated on Thursday, as the higher taxes from foreigners would only come over time but domestic firms would start paying less right away.

Drag on Foreign Investment Limited

China has attracted foreign direct investment at the rate of more than $1 billion a week since it joined the World Trade Organisation in late 2001, and analysts say the tax change's drag on that will be limited because most foreign companies invest in China for many reasons other than preferential tax rates.

Jin also reaffirmed that the government would increase its support for education and rural areas, as outlined in this year's budget.

The government would spend about 224 billion yuan this year to ensure that all children in the countryside received nine years of free education, he said. That spending would rise to 300 billion yuan a year by 2010, he said.

The government would also offer full tuition scholarships at six key teacher-training universities starting from this autumn, in an effort to attract more young people to the profession, Jin said: "The government is most willing to foot the bill for education."

Jin rejected the idea that the central government was not allocating enough funds to provincial governments, leading to local officials' keenness to raise cash by selling land use rights to property developers.

Jin also said that the central government was opposed to the "image" projects that many local governments were building, which were partly responsible for the rapid expansion in capital spending that Beijing is trying to keep in check.