China is likely to unify income tax policies for domestic and foreign-funded companies next year.

Zhang Peisen, a senior researcher with the Taxation Research Institute, said unifying business income tax policies should be the first priority when the government kicks off tax reforms next year.

"Reforming enterprise income tax policies has no risks, because it will not have a big impact on the country's overall tax revenue,'' he said.

For years, tax experts and domestic entrepreneurs have called for a unified income tax system for domestic and foreign-funded companies.

"Domestic companies have borne tax burdens that are too heavy,'' Zhang said. "Their burden was even heavy when taking into consideration the small pre-tax deductions they enjoyed and their low economic efficiency.''

This situation made it difficult for them to compete internationally, he said.

China now has a two-tier income tax system. One for domestic companies and the other for foreign-funded ones.

The income tax rate for domestic companies is 33 percent. Foreign-funded companies pay about 17 percent.

"The tax incentives (for foreign-funded companies) have played an important role in attracting foreign investment when the Chinese market was not open enough,'' said Ni Hongri, a senior research fellow with the Development Research Center under the State Council.

The preferential policies also led to a serious losses of tax income for the country, she said.

However, tax incentives created more pros than cons because they co-existed with such non-tax trade barriers as higher tariffs and import quotas from which domestic companies benefited, she said.

Now that China has become a member of the World Trade Organization (WTO), the country will have to gradually remove trade barriers, Ni said.

Meanwhile, the country will open more sectors including banking, insurance, telecommunications, trade and tourism to foreign investors.

A more open market needs a fair tax environment for domestic and foreign-funded companies to compete on equal footing, she said.

Zhang said unifying the tax policy will not hurt China's efforts to utilize foreign investment.

"What foreign companies cherish most in China is a stable economic and social environment, not merely tax favors,'' he said.

The booming Chinese economy in the middle of a worldwide economic slowdown has made the country a major attraction to foreign companies, he said.

The unification of income tax policies should be in line with WTO requirements, she said.

The new tax system should push China's opening-up forward, taking advantage of foreign investment and increasing domestic companies' competitiveness, Zhang said.

(China Daily November 29, 2003)