China has doubled the tax threshold for domestic firms in a move to narrow the taxation gap between indigenous and foreign-invested companies, the State Administration of Taxation (SAT) said on Friday.
The new tax rate, which took effect in July is expected to cause a loss of 12 billion yuan in corporate tax revenue this year. However, the State Administration of Taxation said it is "a bearable effect" on the country's fiscal revenue.
The move followed a report from the National Statistic Bureau which said that the monthly income of urban and township residents averaged 1,533.75 yuan last year, almost twice the amount in 1999.
A senior SAT official who asked not to be identified described the move as "a significant adjustment" that is aimed at equalizing taxation rates between domestic and foreign firms.
Chinese authorities had hoped to issue a unified corporate income tax law in 2008 but face enormous obstacles.
Last year, fifty foreign-invested companies spoke against the reform proposal, hoping to retain existing preferential policies.
Zhang Peisen, head of a policy research group of the State Administration of Taxation said the tax change is "a justified step", adding that "this adjustment certainly gives a hint at the government's resolve on tax reform."
Chinese authorities had scheduled to table a draft Customs Corporate Income Tax Law to the Standing Committee of the National People's Congress, the Legislature, for first read in August, but objection from foreign investors and growing concern for a drastic decline in foreign investment inflow has caused a delay.
Currently, there are two tax rules in use. One is the Corporate Income Tax Law applied to only foreign-invested companies, the other is the Provisional Ordinance on Corporate Income for Local firms.
Although China began to levy a 33 per cent tax rate on both local and foreign companies from 1994, the Corporate Income Tax Law which applies only to foreign-invested companies contains a number of preferential policies that cuts the tax rate for foreign-funded companies to 15 percent or less.
Co-existence of the two parallel tax rules does not accord with the international practices and has driven local firms into disadvantage, said Deputy Commissioner of SAT Wang Li.
"Considering the resistance in legislation process, China has made a right step in the reform," said Zhang, stressing that the tax threshold adjustment was the statutory right of the State Council.
Source: China View