China to end tax breaks for foreign companies

updated 4:23 p.m. ET March 4, 2007

BEIJING - The tax honeymoon for foreign investors in China is ending.

For two decades, China has rewarded new investors with hefty tax breaks, helping to lure the nearly $700 billion in investment that has helped make this the world's fourth largest-economy, but fueling growing complaints by Chinese companies about unfair treatment.

Now, China's legislature is expected to end this special status after it opens its annual session Monday. A law that state media say is expected to be enacted would equalize tax rates, raising foreign companies' tax bills and cutting those for many Chinese entities.

"This special treatment could not continue forever," said Winston Zhao, a lawyer in Shanghai for the U.S. law firm Jones Day who is advising companies on the change. "Foreign investors have to be prepared mentally, though nobody wants this to happen."

The change is part of sweeping efforts to modernize China's laws to keep pace with explosive economic change and meet World Trade Organization commitments to treat companies equally.

It is too early to know what the financial impact will be on foreign companies, say business groups and consultants. But they say major changes in business plans are unlikely, because companies are still attracted by China's low labor costs and 1.3 billion potential consumers.

"Companies are largely profitable, in it for the long term here and willing to put up with a change in the tax system that is more clear and more fair," said Robert Poole, vice president of the U.S.-China Business Council, which represents 250 American companies.

Until now, new foreign investors were exempt from income tax for two years and got a 50 percent cut for another three. After that, other provisions such as breaks for investing in special economic zones could keep taxes as low as 10 percent.

By contrast, Chinese companies pay 33 percent of their profits in taxes.

The new law would set taxes for all companies at 25 percent, with lower rates for companies in technology development, according to a draft that was given to foreign companies. It says tax breaks already granted to foreign investors would continue for up to five years.

"A unified tax code will create a taxation environment that favors fair competition among all ventures registered in China," Finance Minister Jin Renqing told lawmakers in December, according to state media.

The proposed new tax code is part of efforts to impose uniform business conditions nationwide. But it isn't clear whether Beijing can enforce the changes in a system where tax collection is run by local authorities who are hungry for investment. They often offer huge incentives of their own, and tax collecting, especially for Chinese companies, is uneven.

MORE FROM WORLD BUSINESS

World business Section Front

Coming to America — for a great currency rate France: Is 35-hour workweek a faux pas? Europe's slowing economy may drag on U.S. McDonald’s tastes victory in Europe Roche offers $43.7 billion for Genentech Unified world a central theme in Olympics ads Nazi reference rocks WTO talks Report: Ford to retool U.S. plants America's economic ills spread to Europe Teva to buy Barr Pharma for more than $7B World business Section Front   Add World business headlines to your news reader: