High time for it--Tax plan to end breaks for foreigners
Feb 09
China is preparing to stimulate investment in its economy by reducing taxes for domestic companies and simplifying the tax code.
The new policy, which a senior Beijing official says resembles Reaganomics, will also lead to a de facto increase in the taxes that foreign-invested companies pay, because much of the preferential tax treatment they enjoy will be abolished.
Deputy Finance Minister Lou Jiwei said by the time the plan was fully implemented in two years or so, the new tax rate for all foreign and domestic companies would be between 24per cent and 28per cent.
"Our major purpose is to standardise the system and block loopholes," Mr Lou, an architect of the plan, said. But the lower taxes for Chinese companies, accompanied by what he said would be a gradual shift from using government spending to fuel growth, also underscore how much fiscal policy has evolved in a country that is nominally ruled by communists.
"It's a lot like Reaganomics," Mr Lou said. "We feel that only through simplifying things and lowering tax rates will revenue collection become more efficient. At the same time, we also want to give fuller play to companies, rather than the government, when it comes to investment in the economy."
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A streamlining of China's tax code has long been anticipated. Today's system is a tangle of rules and loopholes with tax dodging rife among companies and individuals. Changes are also required under World Trade Organisation rules that forbid tax regimes that favour foreign companies over domestic ones, and vice versa. Now, all companies are required to pay 33per cent tax on their profits. But tax breaks designed to lure foreign investment into specific industries or regions have meant foreign companies often need to pay only 20per cent or, in some cases, nothing.
"The aim is to find a balance point between the 33per cent nominal rate and the 20per cent actual rate," he said, adding the new rate would be implemented in 2006 at the earliest.
Another significant piece of the reform, affecting value-added taxes, would happen sooner. Companies now pay a 17per cent tax on the value of goods they produce, a cost that is ultimately passed on to consumers. A pilot project to be implemented this year in three provinces will allow some Chinese companies to take equipment purchases and other fixed-asset expenditures as pretax deductions - similar to value-added tax practices used in parts of Europe.
If it went smoothly, "we'll need to quickly expand it to the whole country", he said.
Economists say the plan fits a broader trend in China of putting more investment decisions - and money - in the hands of companies rather than the government.
"It's a significant boost for domestic companies. The government wants to reduce its control over the economy," Citigroup economist Yiping Huang said.
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