BEIJING -- The following is the full text of the Explanation on the Draft
Enterprise Income Tax Law of the People's Republic of China, delivered by
Finance Minister Jin Renqing at the Fifth Session of the Tenth National People's
Congress here on Thursday: Explanation on the Draft Enterprise Income Tax Law of
The People's Republic of China.
Great changes have taken place in China's economy and society, and the
socialist market economy has initially taken shape. With China's accession to
the WTO, the Chinese domestic market has been further open to foreign capital;
domestic enterprises have gradually integrated themselves into the world economy
and are facing ever-increasing competition. If different tax policies continued
to be implemented for domestic and foreign-funded enterprises, the former would
definitely be put at a competitive disadvantage and the establishment of a
unified market with standardized and fair competition would be obstructed.
Moreover, problems are becoming increasingly manifest in the implementation of
the current income tax systems for domestic and foreign-funded enterprises and
these taxation systems can no longer meet new situations in China: First of all,
rather large differences between the current domestic and foreign-funded
enterprise tax laws have imposed unfair tax burden on different enterprises.
Under the current income tax laws, foreign-funded enterprises enjoy more
favorable and preferential treatment than that for domestic enterprises with
respect to policies in tax preference and deductions. An estimate based on a
national survey of enterprise income tax sources shows that the average
enterprise income tax burden on foreign-funded enterprises is 15 percent while
that on domestic enterprises is 25 percent, 10 percentage points higher than
that on foreign-funded enterprises. Domestic enterprises strongly call for
unifying taxation treatment and fair competition. Secondly, some loopholes in
current preferential policies on enterprise income tax distort enterprise
behaviors and lead to revenue loss. For instance, some domestic enterprises
enjoyed tax preference for foreign-funded enterprises by transferring their
funds abroad and then investing them back to China. Thirdly, great changes have
taken place in China's economy and society during the past decade and more since
the current domestic enterprise tax law and foreign-funded enterprise tax law
were enforced. It is therefore necessary to have them timely revised and
improved in line with new situations. Many important taxation policies in
regulatory documents issued by government agencies shall also be timely
incorporated into law. In order to solve above mentioned problems in current
enterprise income tax systems, it is necessary to unify domestic and
foreign-funded enterprise income tax as soon as possible. The reform of unifying
the two income tax laws will not only promote improvement in China's economic
structure and upgrading of its industries, but help foster a legal taxation
environment for fair competition. It is an institutional innovation adaptable to
the new stage of China's socialist market economy and a supporting measure
embodying "Five Balances" which will promote the sustainable development of the
national economy and society. It is one of the landmarks featuring the gradual
maturity and standardization of China's economic system, and a consensual voice
of all walks of life. China's economy is at a stage of rapid development. The
overall performance of enterprises has increased considerably in recent years
and fiscal revenues maintained strong momentum of growth. Under such
circumstances, the conditions are ripe to launch such a reform by drawing on
foreign practices because both the Government and enterprises are financially
stronger to withstand the impact of the enterprise income tax reform.
Guidelines for and principles of the enterprise income tax reform:
The guidelines for the enterprise income tax reform are as follows: to
establish a scientific and standardized enterprise income tax system uniformly
applicable to various types of enterprises and create an environment for fair
competition among all enterprises in accordance with the overall requirements of
the Scientific Outlook on Development and for improving the socialist market
economy by basing the tax reform on the principle of simplifying tax regimes,
broadening tax base, lowering tax rates and strictly enforcing administration of
tax collection, and by drawing on international experience in this regard.
According to above-mentioned guidelines, the enterprise income tax reform will
follow the principles below: (1) the principle of equalizing tax burden to solve
the problem of different tax treatment and largely differentiated tax burden
between domestic and foreign-funded enterprises; (2) the principle of putting
into effect the Scientific Outlook on Development to make overall planning for a
coordinated economic, social and regional development, promote environmental
protection and social progress in an all-round way, and achieve a sustainable
development of the national economy; (3) the principle of giving full play to
taxation as a regulatory instrument to promote industrial upgrading and
technical progress, and optimize the structure of the national economy as
required by the industrial policy of the State; (4) the principle of referring
to international practice to draw on the latest experience of tax reform in the
world, and further enhance and improve the enterprise income tax system, and
make tax law scientific, complete and forward-looking; (5) the principle of
rationalizing distribution relations to effectively collect fiscal revenues by
taking into account both the fiscal affordability of the Government and the
burden on taxpayers; and (6) the principle of facilitating and standardizing tax
collection to make tax payment easier and reduce the cost for both taxpayers and
tax administrators.
