The Standing Committee of China's National People's Congress (NPC) is scheduled to review a draft on Dec. 24 on the unification of income tax rates for Chinese and foreign-invested enterprises.

The date was decided on Friday at a meeting of the NPC Standing Committee's chairman and vice-chairpersons and, if adopted, the bill will bring about the country's largest taxation policy adjustment in two decades.

According to the current law, the income rate for domestic enterprises is 33 percent and that of foreign-invested businesses is 30 percent, set by two separate laws passed in 1985 and 1991.

But through pre-tax deduction, preferential tax rates and tax rate differences, the actual income tax rate can be as low as 13 percent for foreign enterprises but still around 25 percent for domestic enterprises.

Foreign companies fully expect to come off worse when the tax rate is leveled but the Chinese government has remained tight-lipped over the details of the new policy.

"The current tax gap is a discrimination against China's domestic enterprises," said Mei Xinyu, a researcher with an institute under the Ministry of Commerce.

Five years after China's accession to the World Trade Organization (WTO), the country has opened almost all of its economic sectors to foreign capital and cancelled most market access restrictions against foreign businesses, Mei said.

"Today, both domestic and foreign enterprises are competing in the Chinese market. There is no basis for differentiated tax rates any more," he said.

If the discrimination remained, he said, it would undoubtedly reduce the competitiveness and thus hinder the development of China's domestic enterprises. It could also result in the Chinese people believing their government is not willing to safeguard their interests, he added.

"A unified tax system will help calm troubled waters," he said.

According to the procedure of the NPC, the draft will have to be reviewed three times before becoming a law.

China's central bank has made its opinions clear. In a recent report it said the favorable tax policies for foreign enterprises should be adjusted in a timely fashion.

"If you want a fair competition, you must first remove discriminative policies and then favorable ones," said Ma Yu, a researcher with the China's Academy for Economic and Social Research.

"China's ability to attract foreign capital will not necessarily fade after unifying the tax rates," said Yang Yuanwei, an official with the State Administration of Taxation.

"The removal of a favorable tax policy is a minor setback compared with China's huge market potential," he said.

"But for domestic enterprises, the unification of the rates signal that all the enterprises have returned to the same starting point," he said.

(Xinhua News Agency December 16, 2006)