At a symposium at the end of August, the first Sino-US high-level one on tax law, experts discussed the equalization of corporate tax rates for domestic and foreign-funded firms, with many believing it was inevitable and desirable despite opposition from foreign-funded companies.

Tang Gongliang, a Central University of Finance and Economics professor, told attendees China now has a relaxed financial environment and has the money to fund such a reform and the resultant reduction in tax income.

Yu Guangyuan, a member of the Standing Committee of the National People's Congress (NPC), said at the event that in China foreign-funded firms enjoy many preferential tax policies not available to domestic companies.

Different tax rates for domestic and foreign-funded firms violate the principle of fairness in taxation and are not conducive to fair competition, said Yu, and also affect the efficiency of tax administration.

The symposium was organized jointly by Peking University's Finance and Economic Law Research Center, the State Taxation Administration's Taxation Science Research Institute and the International Tax Law Research Association.

To lure foreign investment, the government has offered overseas investors preferential tax rates since the mid 1980s. Currently, the average tax rate for domestic companies is 33 percent while that for foreign firms is 15 percent.

The Ministry of Finance sent a draft to the State Council in August 2004 to equalize corporate tax rates, proposing a unified rate of around 24 percent. Certain tax breaks would still be given in specific industries and regions, but Chinese and foreign-funded firms would be treated equally. Foreign-funded firms would also be given a five-year transitional period.

Fifty-four transnational companies, including Motorola, Nokia, GE, Siemens, Samsung and LG, made a joint submission to the government early this year to demand further prolonging the preferential tax policy for five to ten years.

Lou Jiwei, vice minister of finance, said in mid January that it was inappropriate to grant foreign-funded firms preferential treatment now that China is enacting WTO reforms.

Mei Xinyu, a Ministry of Commerce (MOFCOM) researcher, said preferential treatment has weakened the competitiveness of domestic-funded firms, impeding technical upgrading, industrial structure optimization and their attraction to new talent.

Mei said that in recent years many auto companies have reduced staff and even dismantled research and development departments in order to launch joint ventures with foreign companies to qualify for preferential rates.

The policy also resulted in domestic capital flowing out and then back into China as overseas capital for the same reason, Mei added.

The MOFCOM told a press conference in July that a preferential tax policy is especially important while foreign direct investment (FDI) inflow is declining. China attracted US$38 billion in FDI from January to August, down 3 percent year-on-year, according to the ministry's website.

Lu Jinyong, a University of International Business and Trade investment researcher, said these are short-term decreases: "Actually, a decline is natural after the great increase last year." FDI increased over 13 percent in 2004 on the previous year.

Mei cited the OECD report Trends and Recent Developments in Foreign Direct Investment to say that a preferential tax policy is not the decisive factor in attracting FDI.

The report said overseas investors chose locations not only based on low costs but on market size, and that relaxation of policy control and surveillance and great changes in global trade all affect the flow of FDI.

Experts at the symposium said that, as long as China improves its macro economy and investment climate and holds clear stances to attract foreign investment, it will still be a magnet for global FDI.

According to Stockstar.com on September 5, the Ministry of Finance has proposed a compromise to be submitted to the NPC for deliberation in 2007 at the earliest. In this, foreign-funded firms would still be given certain preferential tax treatment based on an equalized tax rate.

(China.org.cn by Yuan Fang, October 8, 2005)