The following is the full text of the Explanation on the Draft
Enterprise Income Tax Law of the People's Republic of China,
delivered by Finance Minister Jin Renqing at the Fifth Session of
the Tenth National People's Congress on Thursday:
Explanation on the Draft Enterprise Income Tax Law of
The People's Republic of China
(Delivered at the Fifth Session of the Tenth National People's
Congress on March 8, 2007)
Jin RenqingÂ
Minister of Finance, People's Republic of China
Deputies:
Entrusted by the State Council, I now wish to give you an
explanation on the Enterprise Income Tax Law of the People's
Republic of China (Draft).
To improve the socialist market economy and to unify the income
tax system for all kinds of enterprises as called for at the Third
Plenary Session of the Sixteenth Central Committee of the Communist
Party of China, the Ministry of Finance, the State Administration
of Taxation and the State Council Legislative Affairs Office worked
together and drafted the Enterprise Income Tax Law of the People's
Republic of China (version for comments) by taking into account the
new developments of China's economy and society. In 2004, written
comments were sought from the Financial and Economic Affairs
Committee of the National People's Congress (NPC), the Legislative
Affairs Committee of the Standing Committee of the NPC, the Budget
Affairs Committee of the Standing Committee of the NPC, the
people's governments of all provinces, autonomous regions,
municipalities directly under the Central Government and
municipalities separately listed in the State plan, and relevant
departments of the State Council. Roundtable discussions were also
convened among relevant ministries, enterprises and experts
respectively to seek their comments. In 2006, comments were
solicited again from 32 departments and agencies of the Central
Government. The parties concerned generally agreed that it was
quite necessary to accelerate the reform of the income taxation
system for domestic and foreign-funded enterprises (including
Chinese-foreign equity joint ventures, Chinese-foreign contractual
joint ventures, wholly foreign-funded enterprises and foreign
enterprises, the same as below), and enact and enforce a unified
enterprise income tax law as soon as possible to create a uniform
tax environment for fair competition among all kinds of
enterprises. The Enterprise Income Tax Law of the People's Republic
of China (Draft) (hereinafter referred to as the Draft) was then
prepared with further revision and improvement on the basis of the
views from all parties concerned. After being discussed and adopted
at an Executive Meeting of the State Council, the Draft was
submitted to the Standing Committee of the NPC on September 28,
2006 for deliberation. The Draft was deliberated at the 25th
Meeting of the Standing Committee of the 10th NPC. In January this
year, the General Office of the Standing Committee of the NPC
circulated copies of the Draft to NPC deputies and organized
discussions of the Draft. Members of the Standing Committee and NPC
deputies generally held that it is the right time to enact a
unified enterprise income tax law and that the Draft is basically
feasible. At the same time, they put forward some suggestions to
revise the Draft. On the basis of views of members of the Standing
Committee and relevant special committees of the NPC and those of
NPC deputies, the State Council made more revisions to the Draft
and submitted it to the NPC for deliberation. I am now making the
following explanation on the Draft:
I. Necessity and timing for this
legislation
Domestic and foreign-funded enterprises in China are now
governed by different legislations on enterprise income tax.
Foreign-funded enterprises are governed by the Income Tax Law of
the People's Republic of China for Enterprises with Foreign
Investment and Foreign Enterprises (hereinafter referred to as the
Tax Law on Foreign-funded Enterprises) adopted at the 4th Session
of the 7th NPC in 1991, whereas domestic enterprises are governed
by the Provisional Regulations of the People's Republic of China on
Enterprise Income Tax (hereinafter referred to as the Tax Law on
Domestic Enterprises) promulgated by the State Council in 1993. In
order to attract more foreign investment and develop China's
economy, a series of tax policies were implemented for
foreign-funded enterprises since the adoption of the reform and
opening-up policy in China at the end of 1970s, which are different
from those for domestic enterprises. Those different tax policies
have proved necessary in practice and played an important role in
promoting reform and opening-up to the outside world, attracting
foreign investment and developing China's economy. By the end of
2006, 594,000 foreign-funded enterprises had been approved
nationwide in total and US$691.9 billion of foreign funds used. In
2006, all these foreign-funded enterprises paid US$795 billion in
all types of taxes, accounting for 21.12 percent of the total
national tax revenue.
Great changes have taken place in China's economy and society,
and the socialist market economy has initially taken shape. With
China's accession to the WTO, the Chinese domestic market has been
further open to foreign capital; domestic enterprises have
gradually integrated themselves into the world economy and are
facing ever-increasing competition. If different tax policies
continued to be implemented for domestic and foreign-funded
enterprises, the former would definitely be put at a competitive
disadvantage and the establishment of a unified market with
standardized and fair competition would be obstructed.
Moreover, problems are becoming increasingly manifest in the
implementation of the current income tax systems for domestic and
foreign-funded enterprises and these taxation systems can no longer
meet new situations in China:
First of all, rather large differences between the current
domestic and foreign-funded enterprise tax laws have imposed unfair
tax burden on different enterprises. Under the current income tax
laws, foreign-funded enterprises enjoy more favorable and
preferential treatment than that for domestic enterprises with
respect to policies in tax preference and deductions. An estimate
based on a national survey of enterprise income tax sources shows
that the average enterprise income tax burden on foreign-funded
enterprises is 15 percent while that on domestic enterprises is 25
percent, 10 percentage points higher than that on foreign-funded
enterprises. Domestic enterprises strongly call for unifying
taxation treatment and fair competition.
Secondly, some loopholes in current preferential policies on
enterprise income tax distort enterprise behaviors and lead to
revenue loss. For instance, some domestic enterprises enjoyed tax
preference for foreign-funded enterprises by transferring their
funds abroad and then investing them back to China.
Thirdly, great changes have taken place in China's economy and
society during the past decade and more since the current domestic
enterprise tax law and foreign-funded enterprise tax law were
enforced. It is therefore necessary to have them timely revised and
improved in line with new situations. Many important taxation
policies in regulatory documents issued by government agencies
shall also be timely incorporated into law.
In order to solve above mentioned problems in current enterprise
income tax systems, it is necessary to unify domestic and
foreign-funded enterprise income tax as soon as possible. The
reform of unifying the two income tax laws will not only promote
improvement in China's economic structure and upgrading of its
industries, but help foster a legal taxation environment for fair
competition. It is an institutional innovation adaptable to the new
stage of China's socialist market economy and a supporting measure
embodying "Five Balances" which will promote the sustainable
development of the national economy and society. It is one of the
landmarks featuring the gradual maturity and standardization of
China's economic system, and a consensual voice of all walks of
life.
China's economy is at a stage of rapid development. The overall
performance of enterprises has increased considerably in recent
years and fiscal revenues maintained strong momentum of growth.
Under such circumstances, the conditions are ripe to launch such a
reform by drawing on foreign practices because both the Government
and enterprises are financially stronger to withstand the impact of
the enterprise income tax reform.
II. Guidelines for and principles of the enterprise
income tax reform
The guidelines for the enterprise income tax reform are as
follows: to establish a scientific and standardized enterprise
income tax system uniformly applicable to various types of
enterprises and create an environment for fair competition among
all enterprises in accordance with the overall requirements of the
Scientific Outlook on Development and for improving the socialist
market economy by basing the tax reform on the principle of
simplifying tax regimes, broadening tax base, lowering tax rates
and strictly enforcing administration of tax collection, and by
drawing on international experience in this regard.
According to above-mentioned guidelines, the enterprise income
tax reform will follow the principles below:
(1) the principle of equalizing tax burden to solve the problem
of different tax treatment and largely differentiated tax burden
between domestic and foreign-funded enterprises;
(2) the principle of putting into effect the Scientific Outlook
on Development to make overall planning for a coordinated economic,
social and regional development, promote environmental protection
and social progress in an all-round way, and achieve a sustainable
development of the national economy;
(3) the principle of giving full play to taxation as a
regulatory instrument to promote industrial upgrading and technical
progress, and optimize the structure of the national economy as
required by the industrial policy of the State;
(4) the principle of referring to international practice to draw
on the latest experience of tax reform in the world, and further
enhance and improve the enterprise income tax system, and make tax
law scientific, complete and forward-looking;
(5) the principle of rationalizing distribution relations to
effectively collect fiscal revenues by taking into account both the
fiscal affordability of the Government and the burden on taxpayers;
and
(6) the principle of facilitating and standardizing tax
collection to make tax payment easier and reduce the cost for both
taxpayers and tax administrators
III. Main provisions of the Draft
Based on above-mentioned guidelines and principles and with
reference to international practice, the Draft highlights "four
unifications", that is, unification of income tax law applicable to
both domestic and foreign-funded enterprises; unification and
appropriate reduction of enterprise income tax rates; unification
and standardization of deduction; and unification of preferential
income tax policies to introduce a new preferential tax system of
granting the industry-based incentives as the mainstay while the
region-based ones as the supplement. What should be particularly
explained here is that, after the NPC adopts the Enterprise Income
Tax Law of the People's Republic of China (hereinafter referred to
as the new Tax Law), the State Council will formulate implementing
regulations according to the new Tax Law, which will further detail
relevant provisions and become effective at the same time with the
new Tax Law.
(1) Tax rate
The income tax is currently levied on domestic and
foreign-funded enterprises at the same rate of 33 percent. In
addition, foreign-funded enterprises in some special regions are
levied tax at a preferential rate of 24 percent or 15 percent, and
domestic low-profit enterprises are levied tax at two brackets of
special rates of 27 percent and 18 percent respectively. Too many
brackets of tax rates contribute to a relatively large disparity
between nominal income tax rate and effective income tax burden of
various types of enterprises. Therefore, it is necessary to unify
the income tax rate between domestic and foreign-funded
enterprises.
The Draft sets a new tax rate of 25 percent (Paragraph 1 of
Article 4). It is mainly intended to ease the tax burden on
domestic enterprises, and keep a rise as little as possible in tax
burden on foreign-funded enterprises. The loss of revenues should
be within an acceptable margin and the level of enterprise income
tax rates in the world, especially the neighboring countries
(regions), has to be taken into account. The average enterprise
income tax rate is 28.6 percent in 159 countries (regions) around
the world in which an enterprise income tax is applied, while that
in China's 18 neighboring countries (regions) is 26.7 percent. The
rate of 25 percent set in the Draft is relatively low in the world
and will be conducive to enhancing enterprise competitiveness and
attracting foreign investment.
2) Tax preference
(i) Main provisions
In order to unify the income tax burden on domestic and
foreign-funded enterprises, the Draft integrates existing
preferential income tax policies in the following five manners,
taking into account the new situations of tax reform in various
countries. Firstly, the Draft applies a preferential rate of 20
percent to eligible small low-profit enterprises and a preferential
rate of 15 percent to hi-tech enterprises receiving priority
support from the State (Article 28 of the Draft), and grants more
tax preferential treatment to venture investment enterprises
(Article 31 of the Draft) and to enterprises investing in
environmental protection, energy and water conservation, work
safety, and so on (Article 34 of the Draft). Secondly, the Draft
retains the preferential tax policy on investment in agriculture,
forestry, animal husbandry, fisheries and infrastructure
construction (Article 27 of the Draft). Thirdly, the Draft replaces
the policy of direct tax reduction or exemption with a substitute
preferential policy for labor service enterprises, welfare
enterprises and enterprises making comprehensive use of resources
(Articles 30 and 33 of the Draft). Fourthly, transitional
preferential tax treatment shall apply to newly-established hi-tech
enterprises receiving priority support from the State and located
in special zones prescribed by law to develop foreign economic
cooperation and technological exchanges (i.e. special economic
zones) or in the zone where the special policies for
above-mentioned special zones are implemented with the approval of
the State Council (i.e. the Pudong New Area in Shanghai). The
income tax preferential policies for other State-defined
enterprises the development of which are encouraged (i.e.
enterprises the development of which are encouraged in the Western
Development Region) will continue to be implemented (Article 57 of
the Draft). Fifthly, some preferential policies are canceled. For
example, the regular tax reduction and exemption for
production-orientated foreign-funded enterprises as well as the 50
percent tax reduction for export-oriented foreign-funded
enterprises are abolished. In addition, based on the opinions of
some NPC deputies, it is provided in the Draft that enterprises may
enjoy tax reduction and exemption treatment for their "income from
environmental protection projects" and "income from eligible
technology transfer" (Article 27 of the Draft), demonstrating the
country's policy to encourage environmental protection and
technological progress. Through the aforesaid integration, tax
preferences provided for in the Draft mainly cover promotion of
technological innovation and progress, encouragement of
infrastructure construction, agricultural development,
environmental protection and energy conservation, support to work
safety, promotion of public welfare, support to disadvantaged
groups, and special tax reduction and exemption for relief of
natural disasters (Chapter IV of the Draft).
Hi-tech enterprises and small low-profit enterprises play a
special role in the national economy. International practice
indicates that it is necessary to apply favorable tax rates to
hi-tech enterprises and small low-profit enterprises receiving
priority support from the State. Given that the definition of a
hi-tech enterprise or a small low-profit enterprise is an issue of
policy implementation and the standards for such definition should
be updated with the new developments and changes incorporated, it
will be appropriate to set such criteria in the implementing
regulations. Research and assessment on such criteria are being
conducted by the relevant departments of the State Council.
(ii) Transitional measures for enterprises enjoying the
existing statutory tax preferential treatment
Introduction of the new Tax Law will increase the income tax
burden on some old enterprises. To ease this impact, the Draft
develops some transitional preferential measures for old
enterprises established before the promulgation of the new Tax Law
which enjoy low tax rates or regular tax reduction and exemption
treatment under current tax laws and administrative regulations.
According to these transitional measures, old enterprises entitled
to enjoy an income tax rate of 15 percent or 24 percent under the
current tax laws may, pursuant to the regulations of the State
Council, continue to enjoy a gradually increasing transitional
income tax rate within five years after the new Tax Law becomes
effective. Old enterprises entitled to enjoy regular tax reduction
and exemption treatment under the current income tax laws may
continue to enjoy remaining incentives in accordance with the
requirements and period specified by the current income tax laws.
However, for enterprises that have not made any profits and thus
not enjoyed such preferential treatment, the period for enjoying
preferential treatment shall be calculated from the year in which
the new Tax Law becomes effective.
Given the policy considerations and complex background of these
transitional measures, it is provided in the Draft that the State
Council shall develop measures for implementing such transitional
incentives (Article 57 of the Draft).
(iii) Taxpayers and their obligation to pay
tax
When levying tax on organizations or entities other than
individuals, most countries use "legal person" to define a
taxpayer, and the reform to the enterprise income tax system should
be accordingly orientated towards the introduction of a legal
person tax system. Therefore, the Draft no longer uses the
"independent economic accounting" criteria in the current Tax Law
on Domestic Enterprises to define a taxpayer. Meanwhile, it defines
a taxpayer as an enterprise or other organization that earns
income. Such provision is basically in conformity with the relevant
provisions of the current tax laws. To avoid double taxation, the
Draft does not apply to individual proprietorship enterprises and
partnership enterprises.
To be compatible with international practice, the terms of
"resident enterprise" and "non-resident enterprise" are used in the
Draft. A resident enterprise shall perform comprehensive obligation
of tax payment and pay tax on all of its income from sources inside
and outside the territory of China. A non-resident enterprise shall
perform limited obligation of tax payment and generally pay tax on
its income from sources inside the territory of China. In the
international community, several criteria may be used to define a
resident enterprise, such as the "place of registration", "place of
effective management" and "place of head office"; and most
countries adopt a combination of two or more above-mentioned
criteria. In light of the actual conditions in China, resident
enterprises and non-resident enterprises are defined in the Draft
by combining the criteria of "place of registration" and "place of
effective management" (Article 2 of the Draft).
(iv)Taxable income
Taxable income is the base to calculate the amount of the income
tax payable by an enterprise. According to the Draft, the taxable
income of an enterprise is the amount remaining from its gross
income in a tax year after the excluded income, exempted income,
deductions, and carry-forward loss in previous years are deducted
(Article 5 of the Draft).
(a) Income
In the Draft, "gross income" is defined as "an enterprise's
monetary and non-monetary income from various sources" (Article 6
of the Draft). "Excluded income" is defined as income from fiscal
funds such as fiscal appropriations, administrative charges subject
to fiscal administration and government funds (Article 7 of the
Draft). "Exempted income" is defined as income from interests on
treasury bonds and from equity investment such as dividends and
bonus between eligible resident enterprises (Article 26 of the
Draft). These definitions clarify the scope of the taxable income
of an enterprise.
(b) Deductions and taxation of assets
Domestic enterprises and foreign-funded enterprises are now
subject to different deduction of costs and other expenditures as
far as income tax is concerned. For example, a limited deductible
salary and wage system applies to the income tax of domestic
enterprises while an actual salary and wage deduction system to the
income tax of foreign-funded enterprises. The Draft unifies the
policy for deducting various actual expenditures of enterprises,
prescribes the standards for deducting expenditures for public
welfare donations (Article 9 of the Draft) and defines the scope of
nondeductible expenditures (Article 10 of the Draft). It also makes
unified provisions for the deduction of expenditures related to an
enterprise's fixed assets, intangibles, long-term prepaid expenses,
and investment assets and inventory (Articles 11 to 16 of the
Draft).
(v) Administration of tax collection
The collection of enterprise income tax shall be administered in
accordance with the provisions of the Law on the Administration of
Tax Collection. However, there are some special requirements for
administration of enterprise income tax, such as the place of
payment and consolidated tax payment for branches of an enterprise.
Supplementary provisions are made in the Draft to standardize the
administration of enterprise income tax, make tax payment easier
and reduce the cost for both taxpayers and tax administrators.
(a) Methods of tax payment. The current
practice is that domestic enterprises pay tax locally as
independent economic accounting entities while the head offices of
foreign-funded enterprises shall make consolidated tax payment for
them. To unify the methods of tax payment and make tax payment
easier, the Draft provides that a resident enterprise establishing
operational entities without legal person status shall calculate
and pay enterprise income tax on a consolidated basis (Article 50
of the Draft).
(b) Special tax adjustment. Tax avoidance by
some enterprises through various means is serious, and the struggle
against tax avoidance is intense. Thus, on the basis of
international practice, the Draft provides rules for preventing tax
avoidance through transfer pricing among associated enterprises. It
also provides general anti-avoidance rules and articles against
thin capitalization and avoidance through tax havens. Moreover, it
sets forth provisions for assessment procedures and collection of
interest from settling tax arrears as provided for by the State
Council. This will help guard against and prevent tax avoidance and
safeguard the interests of the state (Chapter VI of the Draft).
IV. Impact on enterprise tax burden and fiscal
revenues
With the implementation of the new Tax Law, the tax burden on
different enterprises will change to a certain extent. Tax burden
on a domestic enterprise will decrease while that on a foreign
enterprise will increase slightly. However, the production and
operation of old enterprises will not be seriously affected because
they will continue to enjoy transitional preferential measures for
a certain period. International experience has shown that political
stability, sound economic development, big market, rich human
resources, constantly improving legal environment and government
services are main factors for absorbing foreign investment, and the
tax preference is only one factor. Therefore, the new Tax Law will
not exert a great impact on foreign investment.
With the entry into force of the new Tax Law, the statutory
nominal income tax rate for both domestic enterprises and
foreign-funded enterprises will see an eight percentage point
decrease from 33 percent to 25 percent. However, for those
foreign-funded enterprises that have been enjoying the preferential
tax rate of 24 percent or 15 percent, their statutory nominal tax
rate will rise by one or ten percentage points respectively. Since
some foreign-funded enterprises may continue to enjoy preferential
tax rates for hi-tech enterprises and small low-profit enterprises,
and some others may enjoy transitional preferential tax policies,
the current financial cost for foreign-funded enterprises will not
be greatly affected after the new Tax Law becomes effective. Due to
such factors as decreased statutory income tax rate and increased
deductions, if the new Tax Law is implemented in 2008, domestic
enterprise income tax will drop by 134 billion yuan while
foreign-funded enterprise income tax will increase by 41 billion
yuan and, therefore, fiscal revenues will drop by 93 billion yuan.
Given that transitional measures will apply to old enterprises that
have been enjoying the statutory preferential tax treatment, the
decrease in fiscal revenues will be bigger, but such decrease is
still acceptable to Government finance.
After the new Tax Law becomes effective, head offices will pay
tax for their branches on a consolidated basis. This is likely to
bring about tax source shift in some regions and affect the
revenues of the regions from which tax sources are shifted. In the
income tax sharing reform in 2002, we adopted measures such as tax
prepayment and factor-based distribution of income tax revenues for
trans-regional enterprises that pay tax on a consolidated basis, so
that the issue of tax source shift is addressed to some extent. In
addition, under the current practice of general transfer payment,
the finance resources of the regions from which tax sources are
shifted will be compensated to some extent. Following increasingly
intensified efforts by the Central Government to balance financial
resources among different regions, the role of this compensation
mechanism will become more and more manifest. After the new Tax Law
becomes effective, we will conduct a follow-up study of the issue
of tax source shift and take quick steps to address new problems in
this regard.
The Enterprise Income Tax Law of the People's Republic of China
(Draft) and the explanation on the new law are hereby presented to
you for deliberation.
(Xinhua News Agency March 8, 2007)