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Latest update on the legislation process of the Unified Corporate Income Tax Law
As reported in our previous News Flash issued in January 2007, China's top legislature, the National People's Congress ("NPC") has scheduled to review and discuss the long-awaited draft Unified Corporate Income Tax Law ("Unified CIT Law") during their Meeting in Beijing from 8 to 15 March 2007. It is expected that the final voting will take place on 16 March 2007. The enactment of this Law will cause significant and long-term impacts to the income tax landscape for domestic enterprises ("DEs") and foreign invested enterprises ("FIEs").
The review of the draft CIT Law started with the opening speech delivered by the Minister of Finance, Mr Jin Ren Qing at the NPC Meeting in the morning of 8 March 2007. Although the full text of the draft Unified CIT Law is yet to be available to general public, his speech outlines the importance and timing, theme and principles, important aspects, and expected financial impacts of the draft Unified CIT reform.
Summarized below are the salient points of his speech:
Importance and Timing of the CIT Reform
- The current separate sets of enterprise income tax laws and regulations for DEs and FIEs do not provide a fair tax platform;
- The current tax preferential treatments are showing loopholes;
- The significant economic and social developments of China necessitate the refinement and amendment of the current tax regime; and
- Given the strong fiscal income trend of China in recent years, the possible reduction in tax collection arising from the CIT reform should be affordable and manageable.
Main Theme and Principles of the CIT Law
- Pursue the theme of "Simple Tax System, Wide Tax Base, Low Tax Rate, Stringent Administration";
- Enable the equality of CIT burdens for DEs and FIEs;
- Supports the harmonised developments of different regions and improve environmental protection;
- Improve national economic structure and facilitate upgrading of industry sectors and technologies;
- Develop a scientific, complete and foreseeable tax system;
- Balance the taxpayers' burdens and the Country's fiscal needs;
- Provide efficiency in tax filing and payment process and lower tax collection costs.
Important Aspects of the Unified CIT Law
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Tax Rate |
- Tax rate standardised at 25% for DEs and FIEs.
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Preferential Tax Treatments |
- Reduced tax rate of 20% for small and thin-profit companies and 15% for encouraged high/new-tech enterprises;
- Expansion of the tax incentives for venture capital businesses and for investments in environmental protection, energy and water saving and safe production technique;
- Retention of tax incentives for investments in agriculture, forestry, animal husbandry, fishery and infrastructure projects;
- Replacement of tax incentives for labor service enterprises, welfare enterprises and enterprises making comprehensive use of resources;
- Continuation of tax incentives for newly established high/new-tech enterprises in Special Economic Zones and Shanghai Pudong New Area and for encouraged enterprises in Western regions;
- Cancellation of existing tax holiday available to general production enterprises and to export-oriented enterprises;
- New tax reduction/exemption for income generated from environmental protection projects and technology transfer that meets prescribed criteria.
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Grandfathering of the Current Preferential Tax Treatments |
- Current reduced tax rates (15% or 24%) for existing FIEs will be gradually increased to the standardised rate within the 5 years after the implementation of the CIT Law;
- Unused tax holiday for existing FIEs is grandfathered till the expiry;
- Where tax holiday did not start because of loss situation, it shall be deemed to commence from the effective date of the Unified CIT Law.
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Concept of "Tax Resident Enterprise" ("TRE") |
- TRE concept is introduced whereby TREs are subject to CIT on worldwide income, and non-TREs on China source income;
- TRE refers to an enterprise which is established within China or an enterprise which is established outside China but its effective management office is based in China.
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Tax-free and Tax-exempted Income |
- Tax-free income includes financial appropriation and administrative charges and governmental funds that are managed as the treasury of the State;
- Tax-exempted income includes interest from State bonds and qualified investment income such as dividends paid between TREs.
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Tax Deductions |
- Unified deduction standards such as donation for public welfare purpose and clarified scope of non-deductible expenditure;
- Unified deduction standards for expenditure on fixed assets, intangible assets, deferred assets, investment assets and inventory, etc.
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Anti-avoidance Rules |
- Emphasis on related party transfer pricing regulations and enforcement;
- Addition of general anti-avoidance provision, thin-capitalisation rule, controlled foreign corporation rules, assessment procedures and imposition of surcharge on overdue taxes resulted from anti-avoidance tax adjustments.
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Tax Filing Basis |
- Tax filing on the basis of headquarters combining with branches / business units which do not have separate legal status.
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Expected Financial Impacts on Enterprises
When the CIT Law comes into effect, DEs will experience a reduction of the CIT burden whereas FIEs in general may face a slight increase in future. There should not be significant negative impacts to the existing FIEs considering the availability of the grandfathering treatments. The Chinese government anticipates that the possible reduction in tax collection arising from the CIT reform would not cause too much burden to the Country's current fiscal position. Also, the change in tax filing basis may cause some concerns to the local fiscal positions of different regions but the impacts should not be significant.
Summary
The speech of the Minister of Finance has confirmed some of the information circulated in the public domain and given in the previous speeches of government officials so far. However, there are still unavailable details and ambiguity, such as withholding income tax rate. Moreover, it is still possible to see slight amendments in the final approved version of the Unified CIT Law as a result of the discussions of the People's representatives during the Meeting.
PwC will continue to closely follow up the latest development of this Unified CIT reform and report to our clients and business associates on a timely basis. |
