Full Text: Explanation on China´s draft enterprise income tax law

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.