Foreign and domestic companies now under the same tax code
February 28, 2007 | BY
clpstaff &clp articlesThe Unified Corporate Income Tax (CIT) was passed in March 2007, ending nearly three decades of tax breaks for foreign investors and bringing both foreign…
The Unified Corporate Income Tax (CIT) was passed in March 2007, ending nearly three decades of tax breaks for foreign investors and bringing both foreign and domestic companies under the same tax code. The CIT sets tax rates for most companies doing business in China at 25%. Previously, foreign investors were exempt from taxes for their first two years in China, then often paid as little as 10%. Chinese companies usually paid the 33% rate.
Even though some foreign companies will see their tax bills increase in China, a PricewaterhouseCoopers report says most would welcome a simplified tax system.
The new law marks a change in the way China markets its tax incentives, basing breaks on the desirability of the industry rather than geographic location. Sectors and projects specifically targeted for tax breaks include technology, environmental protection, energy conservation, production safety, venture capital, agriculture, forestry, animal husbandry, fishers and public infrastructure development.
"It seems that [foreign companies] which have been investing and operating in such projects would be not be significantly impacted by the new tax incentive policy," the PwC report says. "However, they must note that the country may adjust the scope and nature of such projects from time to time in line with economic developments. Hence it is necessary for [foreign companies] to follow up on the details of the policies on a continuous and timely basis."
The law, which takes effect on January 1 2008, provides for a five-year phase-in period for foreign companies, allowing those which currently qualify for tax breaks to keep them. The five-year period also provides an opportunity for foreign companies to change the way they do business in order to qualify for the new tax breaks.
The PwC report stresses that low-tech and other manufacturers could qualify for the new tax breaks by raising the high-tech content of their products and production technology and investing in environmental protection, water and energy conservation and production safety at their facilities.
While most of the tax breaks are industry-oriented, the CIT also provides preferential treatment for certain businesses located in China's special economic zones and in Shanghai's Pudong New Area, and for 'encouraged enterprises' located in China's western regions.
PwC analysts say that, despite the increase in tax rates for some companies, China will remain attractive to foreign investors. According to the report: "Even without tax incentives for export-oriented [foreign companies], China can still provide a competitive edge in various non-tax aspects over other manufacturing countries in Asia, [including] relatively high-quality and cheap labour. At the end, the new standardized rate of 25 percent is not too prohibitive compared to the average rate of 26.7 percent of neighbouring countries."
This premium content is reserved for
China Law & Practice Subscribers.
A Premium Subscription Provides:
- A database of over 3,000 essential documents including key PRC legislation translated into English
- A choice of newsletters to alert you to changes affecting your business including sector specific updates
- Premium access to the mobile optimized site for timely analysis that guides you through China's ever-changing business environment
Already a subscriber? Log In Now