SteelOrbis Shanghai
On December 24, an event of great significance took place in
China. The draft bill of the country's proposed new corporate income tax law was discussed during the 25th session of the 10th Standing Committee of the National People's Congress, following its submission by the finance ministry. If accepted, the new law will mark a remarkable shift in
China's tax system, from the current separate corporate income tax rates for domestic and foreign companies, to a new single corporate tax rate for both categories which is to be set at 25 percent.
In the late 1970s
China began to open up to the outside world and make moves to attract foreign direct investment. In this connection, the Chinese authorities issued two corporate income tax laws, dealing with domestic and foreign companies respectively. According to the two laws, a basic tax rate of 33 percent applied to domestic companies, while overseas companies enjoyed a preferential basic tax rate of 15 percent in
China's special economic zones and of 24 percent in the Chinese cities open to foreign investment. Moreover, companies from abroad were also able to avail of other preferential terms, such as pre-tax deductions. Such a favorable policy towards foreign firms has promoted a huge inflow of overseas
investments into
China since the opening up of the country's economy and has contributed greatly to the national economy's rapid development.
However, many Chinese companies feel that they are at a great disadvantage under the current tax system and have insistently called for the introduction of a unified corporate income tax rate. Concerns remain, nevertheless, that the inflow of foreign direct investment would probably decrease in the absence of preferential tax treatment. Disputes as to the advantages and disadvantages of a uniform corporate tax rate have been ongoing for several years now. As the situation currently stands, apart from all deductions before tax and other tax allowances, the practical tax rates are 20-26 percent and 10-16 percent respectively for domestic and foreign companies. The submission and discussion at the National People's Congress of the draft of the new corporate income tax law indicates that the Chinese central government has made up its mind to end the old laws and is now prepared to implement a uniform tax rate for all companies, be they domestic or foreign.
Once the basic rate of corporate income tax is fixed at 25 percent, most domestic companies will benefit significantly. Foreign companies, on the other hand, will lose part of their profits. The average level of profits retained by Chinese companies is expected to increase by between five and eight percent. In some industries, such as
steelmaking, coal and rare metals, the increases in retained profits are expected to be higher than average. This is because under the current tax system such companies benefit little from the preferential tax treatment accorded to other industries such as hi-tech, energy-saving, etc. Thus, the discussions on the new corporate income law are certainly good news for the steel industry. The introduction of the new law would be a milestone with a lasting influence on
China's national economy.