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China plans uniform tax for local, overseas companies
January, 25th 2007

China reiterated plans to create a uniform tax system for domestic and overseas companies, as it seeks to encourage the growth of local enterprises and to reduce its $177.5 billion trade surplus. "Reform is urgently needed,'' State Administration of Taxation deputy tax commissioner Wang Li said at press conference in Beijing on Wednesday. The current system "isn't conducive to creating a level playing field'' for local enterprises.

Overseas-owned companies often pay taxes at a rate less than half that of Chinese companies as they benefit from investment incentives.

A uniform system may help local enterprises compete, as well as discouraging investments from overseas companies, which account for more than half of China's exports, according to Macquarie Securities Ltd. economist Paul Cavey.

"Because the trade surplus is monumentally large, they don't really care if they deter some foreign investment,'' said Cavey. "The trade surplus is now their biggest issue.'' China's legislature is scheduled to pass a law in March to create a uniform tax system, said Wang.

The law will also cut the corporate income tax rate to 25 % from 33 %. Overseas companies often pay less than 15 %, as they operate in special economic zones designed to attract investment. Still, the uniform tax rate may hurt manufacturers in general, rather than just overseas businesses, as they mostly pay a tax rate of less than 25%, said Cavey. This would add to pressure on manufacturers in the country, which are already facing rising land and labor costs, he added. The changes could cut the government's fiscal revenue by 2.5%, based on 2006's total, said William Hess, a Beijing- based analyst at Global Insight, an economic consulting firm. China collected 554.9 billion yuan in corporate taxes last year, 27% more than a year earlier.

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