November 20, 2001	Tuesday	Ramazan 4, 1422

BEIJING, Nov 19: Chinese plans to raise taxes for foreign firms after the country has entered the World Trade Organization came under fire on Monday from overseas business interests for being unnecessary and possibly harmful.

The tax reforms could eventually do away with low rates such as those offered by the country’s economic and hi-tech zones and make foreign companies think twice before investing, they warned.

It will definitely have a perception effect, said Lawrence Sussman, chairman of a tax forum under the American Chamber of Commerce in China. People get excited when a zone offers them a tax holiday.

However current rules, under which foreign firms often pay less than half the tax levied on their Chinese counterparts, are unsustainable, and the only question is when taxes will go up and by how much, local officials say.

Tax harmonisation has reemerged as the clock counts down towards China’s formal accession to the WTO, scheduled to take place on December 11.

The more open market (after WTO entry) needs a fair tax environment for domestic and foreign-funded companies so that they can compete on an equal footing, finance ministry official Zhang Baozhu was quoted as saying in Monday’s state-run China Daily.

Plans to abolish tax breaks for foreign firms have surfaced occasionally in the state press, but the placement of Monday’s report as the paper’s lead story suggests authorities are now getting serious.

The details are still under discussion, and new amendments to the enterprise income tax law leave a bracket yet to be filled in with the new, unified tax rate, according to people familiar with the draft.

Officials involved in preparing the law favor a rate of 25 per cent, likely to be the approximate level once the amendments are adopted, probably in 2003, they said.

Once implemented, the new tax could mean fundamental changes in the conditions under which foreign companies operate.

Chinese companies are currently levied officially at least as much as 33 per cent in taxes, while foreign enterprises benefiting from preferential policies can get away with paying as little as 15 per cent.

Some foreign business groups dispute that the reform is really made necessary by WTO entry.

National treatment means you shouldn’t treat foreigners any worse than locals, said Sussman. It doesn’t mean you can’t treat them better.

The existing preferential tax treatment has been one of the factors behind a steadily rising flow of foreign funds into China over the past two decades.

Last year China attracted more than $40 billion of foreign investment, making it the world’s second-largest destination after the United States.

However local media have argued foreign companies will still enjoy a favorable environment because of the other changes caused by WTO membership.

Some tax professionals say foreign companies are not as pampered as they seem and could even benefit from a unified tax system.

Officially, Chinese companies are paying higher tax rates, but many do get better treatment, often through a refund mechanism, said Dawn Foo, a taxation expert at accounting firm PricewaterhouseCoopers in Beijing.—AFP