On January 1, the central government began to co-share enterprise income tax with local governments.

"Co-sharing the income tax has laid a solid foundation for enterprise income tax reform," Vice-Finance Minister Lou Jiwei said at a closing ceremony of a taxation policy analysis project, run jointly by his ministry and US-based accounting firm Deloitte Touche Tohmatsu, held last week in Beijing.

Before January 1, companies under the central government departments handed their income tax to the central government, while companies under local governments handed their tax to local governments.

"The enterprise income tax reform will undoubtedly affect the income distribution between the central and local governments," Lou said. "Co-sharing the income tax will make the reform easier."

The dual-track enterprise income tax was unfair to Chinese enterprises following China's entry into the World Trade Organization (WTO), said Jin Renqing, director of the State Administration of Taxation.

The income tax rate for domestic companies was 33 percent, while that for foreign-funded companies stood at 17 percent.

"The general trend is for equal tax treatment because domestic and foreign-funded companies should compete on an equal footing," Jin said.

Tax incentives have played an important role in attracting foreign investment when the Chinese market was not fully open, said tax expert Ni Hongri, of the Development Research Centre under the State Council.

Figures from the Ministry of Foreign Trade and Economic Co-operation indicate China had approved 390,484 foreign-funded enterprises by the end of December, involving US$745.91 billion in contractual investment and US$395.47 billion in actual investment.

Last year, taxes paid by foreign companies rose 57 percent to 51.1 billion yuan (US$6.2 billion), accounting for 3 percent of China's total tax revenue.

The preferential policies also led to a serious loss of the country's tax income, she said.

However, tax incentives brought more advantages than disadvantages, because the incentives co-existed with such non-tax trade barriers as higher tariffs and import quotas enjoyed by domestic companies, she said.

"The country will have to gradually remove trade barriers following the WTO membership, Ni said.

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

It also aims to provide an improved market system to include a more complete and transparent legal system, more open markets and more efficient administrative functioning. The more open market needs a fair tax environment for domestic and foreign-funded companies so that they could compete on an equal footing, Ni said.

(China Daily January 28, 2002)