Statement on the New Enterprise Income Tax Law Go back »

2007-03-20 | All chapters

Statement on the New Enterprise Income Tax Law
20th March 2007

China's parliament, the National People's Congress, adopted the new Enterprise Income Tax Law on 16th March 2007. In light of the recent media attention concerning the European Chamber’s comment on this new law, the Chamber would like to take this opportunity to express its opinion on this important piece of legislation.

As the voice of European business in China, European Union Chamber of Commerce in China welcomes the new Enterprise Income Tax Law. European companies are in favour of the equal treatment of foreign and domestic companies and believe that it is a fair measure to make all companies even.

European Chamber applauds a fair and level playing field for all concerned and fully agrees that foreign and domestic companies should enjoy equal treatment in all areas, where this is feasible, for example obtaining licences and other requirements. This is also in line with the spirit of WTO. With the ending of the transition period of China’s accession to the WTO, the Chamber understands and welcomes reasonable changes in the legislative environment.

European Chamber is in support of the WTO principle of National Treatment and believes that successful unification of the enterprise tax law should also be based on the WTO principles of transparency and predictability. Changes to such a policy should be transparent and provide an adequate timeline to allow companies to adapt the new tax law. In European Chamber’s European Business in China Position Paper 2006/2007, the Chamber's Finance & Taxation Working Group has pointed that “FIEs are very supportive of the tax reform and the desire to achieve a more transparent and fair legislation environment. However, retaining some Enterprise Income Tax preferential policies would have a positive impact on both FIEs and domestic companies”. The Chamber is pleased to see that this recommendation has been taken into account by the Chinese government.

The Chamber does not believe the preferential tax treatment of foreign companies was introduced to offset advantages for Chinese companies. These measures have in the past been one of the factors contributing to China’s extraordinary development. They are offered by the Chinese government to further develop certain regions and sectors, but not specifically requested by foreign investors.

Considering the content of the new law, European Chamber’s members certainly welcome the 5-year grace period and preferential tax rate of 15% for high-tech companies. With rapid development of high-tech industry and increasing market need in China, there will be more foreign investment in high-tech sector. It is clearly intended to achieve the innovation goals that the government has set for China over the next 15 years. The Chamber suggests that over the next year the relevant authorities review the work of China’s 15% tax rate incentive in comparison with incentives that high-tech companies will find in other Asian countries. In that way, the 15% rate can be re-assessed and either confirmed or amended in some manner. In order to attract high-tech industries, some other measures are also necessary. At this point, strengthening the protection of Intellectual Property Rights (IPR), which is the core asset of the high-tech industries, could be considered as a priority.

Given strong growth of the Chinese economy, European Chamber thinks that the new tax law will have a minimal effect on European companies’ strategy in China. To some extent, the higher enterprise income tax rate could influence the decision of companies when expanding their business and considering new investment in under-developed areas in China as well as their tax planning for existing operations. Especially for companies producing in China for export, the increased production cost may lead to a reconsideration of their strategy. However, according to our European Business Confidence Survey 2006, the number one reason for companies to do business in China is the production of goods for the Chinese market, whereas only 8% have indicated production for export as their main reason. This indicates that preferential tax rate should not be the key reason for most European companies to invest in China, and therefore should not be the key issue for them to concern when they design or adapt their business strategies.

European Chamber is glad to see the fact that nowadays more and more European companies in China consider themselves to be Chinese companies. The Chamber will continuously assist its members in further contributing to China’s economy and helping to develop a fairer and freer market environment as well as a sound and sustainable economy.

To download this statement, please click here.

For more information, please contact:
Grace Yao, Press Officer of the European Chamber
Phone: +86 10 6462 2066 – 30; E-mail: gyao@euccc.com.cn

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