China New Corporate Income Tax Law: Almost Equal Rates to All Taxpayers

China's parliament, the National People's Congress, adopted the Law on March 16th, 2007, with 2,826 votes for and 37 against, and 22 abstentions, a key signal of a phase-in end of superior treatments to foreign investors for two decades.

Ⅰ The Background to the Adoption of New Enterprise Income Tax Law

Currently and till the effective date of the New Income tax Law, Domestic and foreign-funded enterprises in China  now governed by different laws on enterprise income tax laws. 
The majority of domestic companies are still taxed by 33 percent Generally speaking, the actual tax burden on domestic enterprises is twice that of foreign-funded companies.

Those voices calling for a unified and fair taxation policy have gained strength in the past few years.
On December 29, 2006, the 25th meeting of the 10th NPC Standing Committee was closed in Beijing, with almost all the attendants agreeing to submit the draft income tax law to the deliberation of the Fifth Session of the 10th NPC in March, 2007.

Ⅱ Main provisions of the draft enterprise income tax law

The Law highlights "four unifications":
(1) Unification of income tax law applicable to both domestic and foreign-funded enterprises;
(2) Unification and appropriate reduction of enterprise income tax rates;
(3) Unification and standardization of deduction; and
(4) Unification of preferential income tax policies to introduce a new preferential tax system of granting the industry-based incentives as the mainstay, while the region-based ones as the supplement.

1.Tax rate – 25%
The Law sets a new tax rate of 25 percent (Paragraph 1 of Article 4). It is mainly intended to ease the tax burden on domestic enterprises, and keep a rise as little as possible in tax burden on foreign-funded enterprises. The loss of revenues should be within an acceptable margin, and the level of enterprise income tax rates in the world, especially the neighboring countries (regions), has to be taken into account. The average enterprise income tax rate is 28.6 percent in 159 countries (regions) around the world in which an enterprise income tax is applied, while that in China's 18 neighboring countries (regions) is 26.7 percent. The rate of 25 percent set in the Law is relatively low in the world and will be conducive to enhancing enterprise competitiveness and attracting foreign investment.

2. Tax preference
To ease its impact, the Law develops some transitional preferential measures for the enterprises established before the promulgation of the new tax law which enjoy low tax rates or regular tax reduction and exemption treatment under current tax laws and administrative regulations. According to these transitional measures, the old enterprises entitled to enjoy an income tax rate of 15 percent or 24 percent under the current tax laws may, pursuant to the regulations of the State Council, continue to enjoy a gradually increasing transitional income tax rate within five years after the new Tax Law becomes effective. However, for enterprises that have not made any profits and thus not enjoyed such preferential treatment, the period for enjoying preferential treatment shall be calculated from the year in which the new Tax Law becomes effective.

3. Who’s the Taxpayers
The Law defines a taxpayer as an enterprise or other organization that earns income. Such provision is basically in conformity with the relevant provisions of the current tax laws. To avoid double taxation, the Law does not apply to individual proprietorship enterprises and partnership enterprises.

4. Taxable Income
According to the Law, the taxable income of an enterprise is the amount remaining from its gross income in a tax year after the excluded income, exempted income, deductions, and carry-forward loss in previous years are deducted (Article 5).

(1) Income
In the Law, "gross income" is defined as "an enterprise's monetary and non-monetary income from various sources" (Article 6). "Excluded income" is defined as income from fiscal funds such as fiscal appropriations, administrative charges subject to fiscal administration and government funds (Article 7). "Exempted income" is defined as income from interests on treasury bonds and from equity investment such as dividends and bonus between eligible resident enterprises

(2) Deductions and taxation of assets
The Law unifies the policy for deducting various actual expenditures of enterprises, prescribes the standards for deducting expenditures for public welfare donations (Article 9) and defines the scope of nondeductible expenditures (Article 10). It also makes unified provisions for the deduction of expenditures related to an enterprise's fixed assets, intangibles, long-term prepaid expenses, and investment assets and inventory (Articles 11 to 16).

5. Tax collection

(1) Methods of tax payment

To unify the methods of tax payment and make tax payment easier, the Law provides that a resident enterprise establishing operational entities without legal person status shall calculate and pay enterprise income tax on a consolidated basis (Article 50).

(2) Special tax adjustment

Tax avoidance by some enterprises through various means is serious, and the struggle against tax avoidance is intense. Thus, on the basis of international practice, the Law provides rules for preventing tax avoidance through transfer pricing among associated enterprises. It also provides general anti-avoidance rules and articles against thin capitalization and avoidance through tax havens. Moreover, it sets forth provisions for assessment procedures and collection of interest from settling tax arrears as provided for by the State Council. This will help guard against and prevent tax avoidance and safeguard the interests of the state (Chapter VI).

Ⅲ The Impact of the New Law

Will the tax unification hurt the competitiveness of foreign-funded businesses? Will the new tax law kill their investment enthusiasm?

The answer is no. Jin Renqing, Minister of Finance, said: "A favorable income tax policy will be granted to new and high-tech enterprises, which will help upgrade and optimize the foreign investment structure".

As many of the foreign-invested enterprises in China are in high-tech industries supported by the government, they can also enjoy the 15 percent income tax rate. Meanwhile, according to the Law, the 15 percent favorable tax can be applied to all high-tech enterprises in all areas of the country.
(Simon Lee Esq.)