Tax change means level playing field for foreign, domestic companies

Foreign-funded companies will no longer be exempted from city maintenance and construction taxes beginning Wednesday in a decision by the Chinese government.

China will begin collecting city maintenance and construction taxes and education-supporting taxes from foreign companies, and individuals with commercial interests in the country, effective Dec. 1.

The two taxation items target companies, Zhang Hanya, chairman of the Investment Association of China (IAC) told Xinhua Tuesday, saying the move will create a level playing field, in terms of tax, for all companies operating in the country.

Since the middle of 1980s, domestic companies have been paying city maintenance and construction taxes and education-supporting taxes, which their foreign counterparts, including solely foreign-funded companies and joint ventures, were not required to pay, Zhang said.

"Since China's reform and opening-up, China has provided preferential policies in order to attract foreign investment to boost growth. Foreign-funded companies actually have enjoyed special treatment in terms of land use and taxation," he said.

"China's domestic enterprises have been paying these taxes for decades while foreign companies haven't. The country now seeks a unified taxation standard, this is an improvement and will create a more sound investment climate," Zhang said.

But the move has been criticised by some foreign businesses.

Zhang said this might be in part due to the mistaken belief that the taxes were created especially for foreign companies.

This is not the first change of the kind to China's taxation laws in recent years. China unified income tax rates for both domestic and foreign-funded companies at 25 percent on January 1, 2008, with the previous rate for domestic firms at 33 percent and that for foreign firms at 15 percent.

The government is phasing in the increases over five years, with foreign companies paying 18-percent in 2008, 20 percent in 2009, 22 percent in 2010, 24 percent in 2011 and 25 percent from 2012, although some discrepancies may exist due to local government preferences.

"Considering the fact that some foreign firms in China make fast profits, the new taxation will not add much to their cost burden," Zhang said.

He added both the city construction and maintenance tax and education-supporting tax were based on the total amount of consumer tax, value-added tax, and business tax that companies paid.

Currently, China has a 7 percent rate for the city and construction maintenance taxes at the municipal level, 5 percent at county level, and 1 percent at other lower levels, while the rate for education-supporting taxes is 3 percent.

Net profit of China's leading auto-maker SAIC Motor Corp., for instance, jumped more than 900 percent year on year in 2009, but a major part of the sales had come from its ventures with the U.S.-based GM and Europe's Volkswagen.

Zhang also said the introduction of the new taxes did not mean the environment to invest in China was worsening, adding taxes were not the only thing companies looked at when investing in China.

"It also depended on the country's huge population of 1.3 billion, its huge market, and growth potential," Zhang said.

Liu Kegu, former China Development Bank vice president, said recently that China remained an attractive foreign investment destination due to its high economic growth, political stability at home, huge consumer market, and abundant labor resources.

Figures from the country's Ministry of Commerce show foreign direct investment (FDI) into China increased 7.86 percent year on year in October to 7.663 billion U.S. dollars, rising for the 15th consecutive month.

Inbound FDI for the first 10 months of the year totaled 82.003 billion U.S. dollars, a year-on-year increase of 15.71 percent, indicating China remains a favored investment destination for foreign businesses.
(Source:xinhua)