BIZCHINA> Taxation
New corporate tax offers level playing field
By Jiang Wei (China Daily)
Updated: 2007-03-09 09:24

Ever since the subject of a unified corporate tax rate was raised, some experts and analysts have been voicing concern that the move could hurt the inflow of overseas direct investment into China. But Lu feels most overseas-funded firms would not change their investment strategy in China in the long run.

Why? Because, CITIC's China Securities analyst Hu Yanni says, a unified tax regime is one of the factors that attracts overseas direct investment. The key issues in China should be abundant human resources, social stability and an irreplaceable market.

The new system, however, will be phased out over five years, with the tax rate for investors from abroad being raised by 2 percentage points every year. "Overseas investors have five years to adapt to the changes," Hu says. In fact, a number of such businesses have already started internal adjustments to offset the impact of a unified tax rate.

The changes in the corporate income tax rates are expected to benefit some domestic industries. For example, a lower tax rate means higher profit for domestic banks.

CITIC China Securities banking analyst She Minhua says a bank will see a 1 to 1.5 percent profit gain if the income tax is cut by 1 percent. Therefore, if it's lowered from 33 to 25 percent, domestic banks could realize an added profit of 8 to 12 percent. For a bank like theIndustrial and Commercial Bank of China(ICBC), which had a pre-provision profit of 78 billion yuan ($10.08 billion) in 2005, it means an added gain of 6 billion yuan ($775.19 million).

Domestic manufacturing companies involved in some traditional sectors would be among the major beneficiaries. Most of such firms now have to pay a 33 percent income tax because they neither enjoy the favorable tax rates like the overseas firms, nor any of the tax reductions given to domestic high-tech businesses.


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