The message from Central Bank Governor, Dai Xianglong, that
domestic and foreign enterprise income taxes will be unified next
year is welcome news indeed for Chinese enterprises.
Insiders in domestic enterprises said that this unification has
been long hoped for. It will finally provide a level playing field
for Chinese enterprises to compete against foreign enterprises.
Domestic enterprises, which have been subject to over twice the
income tax rate of foreign-funded enterprises, will now finally see
an end to this heavy tax burden. The differential in domestic and
foreign income tax rates is to be consigned to the history books
now that it has served its historical purpose.
However, insiders in foreign-funded enterprises are not too
sensitive about the pending unification. According to them, though
foreign enterprises have enjoyed preferential tax rates under the
umbrella of the dual system, domestic enterprises have been in
receipt of compensating financial subsidies from local governments.
Consequently, the composite tax burdens on domestic and foreign
enterprises are already broadly equivalent in practice.
Internal Control Supervisor, Ma Huibing of ASIMCO (Asian Strategy Investment
Company), said, "Theoretically, foreign-funded enterprises will
lose their preferential tax treatment and face stronger competitive
pressures once enterprise income tax is unified. But though they
will have to operate on a level tax footing after unification, the
positions have already been converged in practice".
Ma
Huibing holds that although the nominal tax rate for domestic
enterprises is 33 percent, subsidies from local government have
been sufficient to balance their tax burden. Thus the tax burdens
for domestic and foreign enterprises are already equitable.
Furthermore, domestic enterprises will gain some additional
advantage through local business practices. Foreign enterprises do
not accrue such benefits because of the internationally
standardized nature of their operations.
Fan Zhongshan, a chief partner of Zhengde
Dacheng Financial Consultants Co. Ltd., said that domestic
enterprises are forced to seek financial subsidies from local
governments by the unfair nature of the current enterprise income
tax system. Domestic enterprises are pushed down this route by the
artificial mechanism of the tax differential.
Foreign-funded enterprises presently benefit from full tax
exemption for the first three years once in profit. This is then
followed by a reduced liability for further two years. They also
conform to the usual international practice of deducting allowable
expenses before application of tax.
Domestic enterprises do not enjoy these tax breaks and in addition
are subject to restrictions on the amount of their allowable
expenses.
An
insider in a Chengdu industrial company said that they had already
made alternative arrangements for tax payment instead of receiving
financial subsidy from the local government. As a result, the
pending unification of enterprise income taxes will not have a big
influence on their business.
China's WTO (World Trade
Organization) entry will have its greatest impact on the financial
and agricultural sectors. Domestic financial enterprises in
particular have long complained that the unfair tax burden has
hindered them unfairly in their competition with foreign financial
enterprises.
Zhou Qigang of the China Pacific Insurance (Group) Co. Ltd. said
that foreign-funded insurance companies pay lower taxes and enjoy
more benefits. They are then able to use these savings to offer
discounts to their clients or to fund promotional advertising.
China Pacific Insurance is not able to compete fairly via these
marketing tools because it is more highly taxed.
A
good example of a foreign-funded enterprise is China Ping An
Insurance. It is located in Shenzen, a Special Economic Zone, and
enjoys an enterprise income tax rate of just 15 percent.
China Ping An can shelter all its funds in this benign tax
environment in Shenzhen and so maximize its returns to
shareholders. Pacific Insurance however, as it does not have
foreign backing is denied this opportunity and in fact has a
composite tax burden of some 40 percent. Moreover, listed companies
may make tax returns and again this is a facility unavailable to
the unlisted Pacific Insurance.
A Necessary Change?
Gao Peiyong, a professor with the thinks that tax unification is a natural outcome of
China's WTO entry as well as of the development of China's tax
system. He said that China had committed itself to the "
WTO National Treatment Principle" not to discriminate against
foreign-funded enterprises. But in the field of enterprise income
tax, it is actually the foreign enterprises that enjoy preferential
treatment and the domestic enterprises that suffer discrimination.
Since last December when China joined the WTO, enterprise income
tax laws have remained unchanged. Though trade disputes have begun
to emerge, no enterprise income tax dispute has so far been filed.
WTO rules include no specific requirements that would directly
require unification of the two tax regimes.
Formula rules under which deductions are calculated vary for
domestic and foreign enterprises. The net effect is that foreign
enterprises might be paying about 50 percent of what domestic
enterprises pay.
As
a result of past adverse trading conditions, domestic enterprises
do lag somewhat behind in levels of equipment and staff training.
It would be over-ambitious to expect them to be immediately ready
to stand up to the full force of international level competition.
It's not the WTO rules but China's tax system itself that has led
to the need for review. In the field of income tax, the "WTO
National Treatment Principle" should be applied first to domestic
enterprises rather than to foreign enterprises.
Gao Peiyong went on to say that even if China had not joined the
WTO, the development of the socialist market economy would also
require unification of the two systems of taxation. The issue has
been on the agenda since 1992. As current tax laws set disparate
conditions for the two different types of enterprises, competition
clearly cannot be on an even footing. It is discriminatory and is a
rather obvious example of the anomalies that exist in the economic
system.
Another characteristic of a market economy is free movement of
trade. To join the growing swell of the global economic family, it
is necessary to trade across international boundaries. This will
inevitably involve convergence of China's tax system with
international practice. This will provide a challenge in reaching
agreement on such issues as double taxation and tax exemptions.
Difficulties will arise from the dual nature of the current system.
Opening-up the economy will require our tax system to conform with
international practice so revision is inevitable.
Already Done the Job?
Though the dual income tax laws were enacted in 1994, they can
trace their roots back to the 1970s.
In
1981, the government first passed the Sino-foreign Joint Venture
Enterprises Income Tax Law, then later the Sino-foreign Cooperative
Enterprise Income Tax Law. By 1987 these two laws had been subsumed
into a single Foreign Enterprise Income Tax Law.
In
1994, income tax requirements placed on state-owned enterprises,
collective enterprises, private enterprises and the self-employed
were unified to create the Domestic Enterprises Income Tax Law. The
extant dual enterprise tax system has been in place since then.
There were sound historical reasons for the introduction of
preferential enterprise income tax. It promoted inward investment
during the early years of economic reform and the opening-up of the
country. Now that the economy is becoming more and more global, it
is no longer necessary to retain such differential tax
treatment.
However, Gao Peiyong said that it was not yet certain that reform
could be put in place as early as next year.
(china.org.cn by Alex Xu, July 16, 2002)