Merger Of Two Taxes Favorable Foreign Trade In China
Since the reform and opening up, in order to attract foreign investment, China has formulated a series of foreign tax credits preferential policies, the implementation of these policies and measures making the scale of foreign businesses rapid growth.
After Chinas accession to the WTO, tariffs dropped significantly and the degree of market opening further increase. In order to create a fair competitive market environment and promote foreign and domestic-funded enterprises enjoying equal national treatment, China combines Interim Regulations on Enterprise Income Tax of Peoples Republic of China which applying domestic enterprises and Regulations on Enterprises with Foreign Investment and Foreign Enterprises Income Tax of Peoples Republic of China which applying to the foreign enterprises to one tax act, and to implement a unified tax rate of 25%.
Increase tax burden of foreign-funded enterprises in the short-term
After the two taxes combined, the new tax law abolished two exemptions and three halved tax incentives for foreign-funded enterprises, the income tax rate of foreign-funded enterprises from 15% up to 25% and increase the tax burden on foreign-funded enterprises in the short term. In addition, for some small and medium-sized foreign-funded enterprises with high-energy consumption, merge of the two taxes canceled the related preferential policies and the corporate profits are facing a critical point, which affects the reinvestment enthusiasm of foreign-funded enterprises in a certain extent.
Optimize the market environment and industry structure
However, according to the present effects of merger of two taxes, foreign trade paid more attention to Chinas stable economic and political environment, the huge market potential, low labor and resource endowments, from a macro point of view, the merge of two taxes will not damage the long-term interests of the foreign-funded enterprises, but can promote the foreign trade in China.
First, under the old tax system, super-national treatment on income tax of foreign-funded enterprises making domestic enterprises at a cost disadvantage, so that there are many fake foreign investments. After combined two taxes, the preferential system instead of GSP, so that domestic enterprises can stand on the same starting line with the foreign-funded enterprises. This can create a fair market competition environment and promote the healthy development of Chinas economy.
Secondly, from an international point of view, the existing 25% corporate income tax rate is in the middle and lower level, if foreign investors invest a particular industry or field of companies, such as energy saving, sewage pollution control, etc. can also enjoy preferential policies. Foreign-funded enterprises have good scientific and technological innovations, so they will gain a competitive advantage of these fields in a quite long period.
In addition, in the beginning of the reform and opening up, some of the old and famous foreign-funded enterprises invested in China for the various preferential policies and Chinas potential market, exist preferential dependence to a certain extent. But with the implementation of the new tax law, improving the quality of labor and steadily improving the infrastructure and market system in China, Chinas industrial structure continuously optimize, the low-tech and low-value-added foreign capital has become high-tech and high-value-added one, the quality of foreign investment greatly improve.
In short, merger of two taxes will provide a favorable opportunity for Chinas industrial structure upgrading and market environment optimization, foreign-funded enterprises can find the new economic growth point in the Chinese market on the basis of the new interpretation of tax law and to maximize corporate profits.
by: ken xu