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What would the affect of the New Corporate Income Tax Law have if it was implemented in 2008?


In late December 2006, the Standing Committee of the 10th National People's Congress of the People's Republic of China PRC approved a draft Corporate Income Tax Law. The law meant that a unification of the enterprise income tax rate of 25%. The Draft Tax Law would also eliminate certain preferential tax rates currently available only to foreign-invested enterprises.
The Standing Committee will next submit the Draft Tax Law to the full NPC for voting during its next session in March 2007. If approved the expected Draft Tax Law will take effect on 1 January 2008 (the "Effective Date").  
While the Draft Tax Law has not been made public, press reports have highlighted these features
1.             Unified Corporate Income Tax Rate
As noted, the Draft Tax Law would unify the EIT rate at 25%. This rate is higher than the 15% to 24% rate enjoyed by some FIEs located in special foreign investment zones or operating in certain sectors, but lower than the 33% rate currently applicable to other enterprises, including domestic enterprises. In addition, the Draft Tax Law would offer a possible 20% rate for small enterprises meeting certain eligibility criteria (to be defined by the State Council in the anticipated implementation regulation).
2.             Fewer Tax Preferences For FIEs      
Currently, FIEs enjoy many preferential tax policies, including reduced tax rates for FIEs located in Economic and Technological Development Zones and full exemption and partial tax reduction/exemption for FIEs engaged in production operations during tax holidays. The Draft Tax Law would eliminate such preferential tax policies and replace them with the following:
          A 15% preferential tax rate will apply to high-tech businesses that promote technological development.
          Other tax incentives will apply to venture capital enterprises, as well as foreign and domestic companies engaged in infrastructure construction, environmental protection, water conservation, and production safety projects.
          Tax incentives will remain available for investors seeking to invest in the inland provinces or other less-developed regions of the PRC.
3.                Transition Period
Under the Draft Tax Law, existing FIEs will be given a 5-year grace period during which they would pay taxes at a gradually increasing rate every year. The transitional period would impact FIEs as follows:
          FIEs that have started their tax holiday: existing FIEs currently enjoying a fixed-period of tax reduction/exemption under the current law can continue to enjoy tax incentives for the remaining period; in other words they will be "grandfathered" to retain their tax breaks for any unused years.
          FIEs that have not yet started their tax holiday: for existing FIEs that have yet to make a profit and thus have not enjoyed any tax reduction/exemption incentives, the tax exemption and reduction period will be calculated from the Effective Date.
          FIEs established after the Effective Date: FIEs that are established after the Effective Date or that commence business operations following the Effective Date will only be able to enjoy any tax exemptions or reductions available to them under the new regime.
Therefore, although the Draft Tax Law has yet to become formal law, foreign investors currently contemplating the establishment of an FIE in the PRC which might enjoy tax holidays under the current regime may wish to expedite the process.
Despite the fact that the Draft Tax Law may be subject to change prior to the next NPC session in March, foreign investors are likely to expect a unified EIT rate of around 25%, a unification of preferential tax policies for select industries and enterprises operating in certain sectors, and transitional measures to cushion the impact of the Draft Tax Law.


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