The proposal to unify the tax rates of domestic and foreign-funded firms has aroused heated debate nationwide. Despite strong opposition from foreign-funded firms, many officials and experts believe that a unified tax rate is inevitable, saying current tax policies actually discriminate against domestic firms.

The plan, drafted by the Ministry of Finance, was sent to the State Council for discussion last August, but not finalized. The Daily Economic News quoted Cong Min, vice director of the State Council Research Office's macroeconomics department, as saying that it will be submitted for discussion and approval at the next session of the National People's Congress.

Currently, nominal income tax for domestic enterprises is 33 percent, while that of foreign-funded enterprises is only 15 percent. The ministry proposed a unified rate of around 24 percent. Certain breaks would still be given to specific industries and regions, but Chinese and foreign-funded firms would be treated equally. Foreign-funded firms would also have 5-year transitional period, during which additional tax will be refunded.

Fifty-four transnational companies, including Motorola, Nokia, GE, Siemens, Samsung and LG, voiced their opposition to the proposal in a joint submission in early January.

However, Finance Minister Jin Renqing pointed out that foreign investment in China has a yield ratio of over 10 percent, and, set against low-interest-rate US Treasury-bonds bought by China, this means money is actually being transferred to the US.

Lou Jiwei, vice minister of finance, also stressed in mid January that it was inappropriate to grant foreign-funded companies preferential treatment now that China is enacting WTO reforms. The different rates and thresholds also bring difficulties for tax collection, he said.

Dr. Mei Xinyu, a researcher from the Ministry of Commerce, agreed with Lou, attributing existing preferential tax policies to the immature investment environment of the past.

Nowadays, China's investment environment is continually improving, capital is abundant, market entry is broadening and foreign investors have more financing channels.

The discriminatory policy, if continued, will have negative effects on the economy and businesses, he pointed out.

Mei also warned that foreign direct investment (FDI) boosts high growth of exports, but also worsens energy supply, raw material consumption and environment. Investment from sources chiefly seeking tax breaks, about one third of total FDI, might increase pressure on exchange rate appreciation, cause investment overheating and disturb government macro-control measures.

"The unequal tax policy will undermine domestic enterprises' operations. They will try to get preferential policies from government instead of devoting themselves to management and technical upgrading," said Mei.

Liu Sangxi, vice director of the Finance Science Research Institution (FSRI), says that it is time for a unified enterprise income tax. The huge domestic market, cheap labor costs and rapid economic growth bring huge business opportunities. Foreign investors are chiefly attracted by the prospect of significant market shares - tax breaks are a plus, not the reason they're here.

Instead, China could choose high-quality foreign investors according to its industrial structure and strategic requirements, he added.

The Ministry of Commerce, which is wary of possible FDI withdrawal, holds a more conservative stance. However, experts believe that tax unification will have limited impact on foreign-funded enterprises and their investment in China.

Foreign-funded enterprises are only a small proportion of total enterprises, and their income tax volume is estimated to be lower than 20 percent of the total, according to Jia Kang, director of the FSRI.

A tax expert from PricewaterhouseCoopers said that the strong reaction of transnational firms is mainly due to psychological pressure.

Analysis of FDI inflow shows that it is mainly attracted to China's good economic environment, promising market, human resources, market system and judicial system, while tax preferences and policy support are usually the last factors to be considered.

Tax unification would indicate that the government is striving to create fair competition and eliminate corruption and power abuse, opacity and uncertainty, all of which could improve the confidence of investors.

(China.org.cn by Tang Fuchun February 2, 2005)