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2006-12-26 | All chapters

Chambers OK New Tax Law
Ding Qingfen, China Daily, 26th December 2006

International companies in China are expecting a grandfather period to provide time for them to adjust to the long-awaited corporate income tax unification, although they realize the change is inevitable.

Analysts and officials don't expect that foreign direct investment (FDI) in China will shrink much in years to come, because the preferential tax regime is not the only boon for enterprises coveting China.

Executives from major international companies in China, including 3M, Pepsico International, General Motors and Johnson & Johnson refused to accept telephone interviews with China Daily about the unified tax system, with many citing the same reason: "It is too sensitive a topic to say anything right now."

However, both the American Chamber of Commerce in China (AmCham-China) and the European Union Chamber of Commerce in China (European Chamber) suggested a grandfather period before the transformation, which cannot take effect until 2008.

"While we see tax system unification as an inevitable trend, AmCham-China cautions against implementing a tax system that fails to continue providing incentives to new and ongoing investment," James Zimmerman, chairman-elect of AmCham-China, told China Daily.

"AmCham-China's recommendation is to grandfather the existing preferential treatment for foreign companies when reforming the tax systems for initial and recurring investment."

Zimmerman's idea is echoed by the recently published European Business in China Position Paper 2006/2007, which says "the new Enterprise Income Tax Law will likely come into effect starting 2008, and its implementation may result in the elimination of some of the preferential tax treatments currently enjoyed by foreign investors. A transparent and smooth transition will be required, especially for foreign companies to adjust to the new law."

More importantly, the paper recommends authorities concerned provide foreign businesses a grandfathering period for the current tax incentives, such as a reinvestment refund, tax holidays and reduced tax rates.

Despite these suggestions, AmCham-China and the European Chamber seem to be reluctant to say goodbye to the old and prevailing enterprise income tax regime.

According to its position paper:"It has been very important in promoting foreign investment. Foreign companies are very supportive of the tax reform and the desire to achieve a more transparent and fair legislation environment. However, retaining some preferential policies would have a positive impact on both foreign and domestic companies."

Zimmerman agrees. "Foreign companies face many challenges when entering a new market, such as unclear regulations, lack of transparency and local protectionism. The preferential tax treatment provides a level playing field," he said.

But according to He Jun, senior analyst with Anbound Group, a local research company, China can't always rely on preferential policies to attract FDI and develop its economy.

"Foreign investors should look at the new law in a rational way. There are many other things that deserve their consideration when it comes to whether or not to invest in China, such as transparency in the processes of making the rules and regulations, as well as some unpredictable factors," he said.

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