China to Enact Uniform Corporate Income Tax Law
March 21, 2007
Kai Yang - Beijing
China is in the process of drafting a uniform corporate income tax law. Currently, there are two parallel income tax laws, the Interim Regulations on Enterprise Income Tax (promulgated December 13, 1993, and effective January 1, 1994), which is applicable to domestic enterprises, and the Income Tax Law for Foreign Invested Enterprises and Foreign Enterprises (enacted April 9, 1991, and effective July 1, 1991), which is applicable to foreign invested enterprises and foreign enterprises. Under the tax law, a company in China is generally required to pay income tax at a rate of 33 percent. But because of various tax benefits conferred by the central or local governments, the actual tax rate for a foreign invested company can be as low as 15 percent; in addition, manufacturing foreign invested companies may enjoy certain tax holidays. Moreover, a foreign investor may be entitled to a tax reduction or exemption for dividend distributions. Another distinct advantage for foreign invested companies is that a foreign invested company can make a full deduction of salary and benefit expenses, while a domestic company may only deduct a specific portion of salary payments. The tax laws have been widely criticized for lack of harmony as well as resulting discrimination against domestic enterprises.
On December 29, 2006, the draft Enterprise Income Tax Law (the Draft Law) passed the first reading of the Standing Committee of the National People’s Congress (NPC), and will be submitted to the 10th session of the NPC for a vote in March 2007. According to an official of the Ministry of Finance, if voted upon favorably, the new law will likely take effect on January 1, 2008. Under the Draft Law, companies, including foreign invested companies, would generally be subject to a uniform tax rate of 25 percent. The enactment would also signify a shift of income tax policy. The Chinese government has been utilizing preferential tax treatment as an important means for industry promotion. Under the current tax law, companies doing business in particular geographic regions such as a special economic zone or an economic development zone would automatically enjoy certain tax benefits. Under the Draft Law, by contrast, a preferential tax rate of 15 percent would only be granted to companies operating in specific industry sectors, such as energy efficiency, environmental protection and high-tech. n
For more information, e-mail Kai Yang at kai.yang@hklaw.com or call toll free, 1-888-688-8500.