Evidences show that the unification of respective income tax systems for domestically funded enterprises and those foreign-funded ones is being expedited. Recently, Cheng Faguang, a commissioner of the Financial and Economic Committee of National People's Congress (NPC), stated on the "Forum for Taxpayers" held by Chinese Tax Institute (CTI) that the reform to combine those two tax systems is expected to step into a substantive stage this year. It's reported that relevant aspects are getting the new Corporate Income Tax (Draft) well prepared for discussion on the conferences of the NPC Standing Committee in the coming August.

Demands of domestically funded enterprises and foreign-funded enterprises

As to the unification of two tax systems, which has been considered and discussed for years, it refers to the combination of Regulations of the People's Republic of China on Income Tax and the Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises.

The coexistence of two respective income tax systems for domestically funded enterprises and foreign-funded enterprises, which came into existence during China's process of reform and opening up, has played a positive role during such a process and in the utilization of foreign funds. However, with the rapid development of China's national economy and the gradual formation of the socialist market economy, especially in face of the new situation after the WTO entry, the coexistence of two tax systems is becoming more and more unsuitable for the development of China's socialist market economy.

As shown by a group of data from the iron and steel industry, from 2001 to 2003, the average circulating tax burden of Anshan Iron and Steel Group Corporation is 9.67 percent, and its income tax burden is 44% and the tax burden per ton is RMB346 yuan; in contrast, such three figures for foreign enterprises are 4.47 percent, 11.82 percent, and RMB166 yuan. In Anshan Iron and Steel Group Corporation., it was once made known that during domestically funded enterprises' competition against foreign-funded enterprises, it seemed that domestically funded enterprises were pulling a heavily-loaded cart, which was loaded with problems left over in history, up a hill; all problems like enterprises tied with social responsibilities, laid-off workers and large collectives will be settled by state-owned enterprises themselves. Thus, a conclusion can be easily drawn that domestically funded enterprises are eagerly expecting that a unified tax system can be set up as soon as possible so that they can compete with foreign enterprises under the same circumstance. As inferred by experts on taxation issues, the unified income tax rate for enterprises can be fixed at 24 ~ 27 percent. Even with a tax rate of 27 percent, tax saved in Anshan Iron and Steel Group Corporation can save RMB500 million yuan each year out of its tax payment; such funds will be sufficient for the Corporation to conduct technological upgrading.

Peng Fei, IBM (Greater China)'s manager of taxation affairs, expressed that what foreign-funded enterprises care about was the continuity and sustainability of the system after reform, and whether relevant policies adopted during the reform process were in accordance with international convention.

Issues involved in the unification of two tax systems

Then what are involved in the unification of two tax systems or what are to be unified?

Relevant studies also indicate that the unification of the two tax systems implies launching a system of levying income taxes on corporate entities. Enterprises qualified as a corporate entity will be levied of corporate taxes while those individually funded enterprises or joint enterprises will be levied of individual income taxes. The advantage of levying corporate income taxes lies in that it will be made convenient to define taxpayers and the obligation to pay taxes and that income taxeswill cover all economic activities in the society. To unify the tax rate means to get the various income tax rates simplified and merged and implement a uniform mildly lower proportional tax rate while taking into consideration the present tax burden of domestic enterprises and the tendency of income tax development in the whole world, to simplify and merge the present income tax rates and to carry out a unified rate at a medium or lower level. Getting tax base unified then sufficiently materializes compensations for labor, capital, technique and risks. With preferential policies on taxation unified, taxation preference will be included into budget control and expenditures will be arranged in the form of taxes.

Remaining attractive to foreign investment

After the unification of corporate income tax rate, will it be less attractive to foreign investment? That is an issue under disputes.

As for this matter, Yang Yuanwei, Vice Director in Department of Policy, Laws and Regulations under the State Taxation Administration, said that such an issue should be analyzed and judged in the following aspects, Factors that are taken into consideration when a foreign enterprise makes decisions on investment include market potential, stability of political status, cost of labor, values of additive land resources, and at last preferential policies. In this round of unification for corporate income tax systems, if the tax rate will be maintained at a relatively low level compared with neighboring countries, the tax system will also tend to be rather competitive even if preferential policies are adjusted. Meanwhile, the new corporate income tax law will offer the present foreign-funded enterprises appropriate preferential measures during this transitional period, and protect their vested interest, thus realizing a smooth transition. Considered from the above aspects, it's safe to say that the unification of corporate income tax systems will bring forth too many negative impacts on the introduction of foreign investment. Instead, it will not affect attraction to foreign investment but improve the capability to attract foreign investment.

The combination and reform of the law and regulation concerning corporate income tax is the vital part in the new round of tax system reform. On one hand, a perfect income tax system will promote the virtuous circle of the national economy and accelerate a harmonious development in various regions; on the other hand, in term of taxation, income taxes will bear more responsibilities with more importance. In the newly issued plans and essentials for the Eleventh Five-Year Plan, certain contents of new-round tax system reform have already been included. This year is the beginning of the Eleventh Five-Year Period. It's reasonable to believe that it is a necessary choice to drive the unification of corporate income tax systems in compliance with the implementation of strategies for the national economic development.

Editor: Yan