The massive influx of foreign investment in China will not be stumbled over an increased enterprise income tax rate for overseas companies, said analysts.

Liang Hong, chief China economist from Goldman Sachs Asia, said that China's rapid economic development and higher returns for investment compared with other countries are major appeals to foreign investors.

Foreign capital will continue to swarm into the Chinese market, though investors may give a thought to the ten-percent rise in income tax rate, Liang said.

The draft enterprise income tax law, which suggests unified income tax rate for domestic and foreign companies at 25 percent, was submitted for deliberation to the ongoing annual session of National People's Congress (NPC), China's top legislature, on Thursday.

Minister of Finance Jin Renqing told the lawmakers that the equalized income tax will help promote the optimization of China's economic structure and upgrading of industries, and foster a fairer taxation system for competition.

"The new tax reform is an institutional innovation adapted to the new development of China's socialist market economy and a subsidiary measure supporting the country's sustainable development strategy," said Jin while explaining the draft to the legislators.

"The draft law, one of the landmarks signaling the maturity and standardization of China's economic system, has echoed the consensus reached by people from various social circles and voiced their concern," Jin added.

China's current dual-income-tax mechanism has long been the subject of intense debate. Many Chinese economists, government officials and business leaders have openly criticized the tax policies as being unfair to domestic businesses.

The actual average income tax burden on Chinese companies is 25 percent, while that on foreign enterprises is 15 percent, Jin said. The draft sets a new tax rate of 25 percent for both.

Many people believe that it handicaps domestic players who have been facing tougher competition since China joined the World Trade Organization (WTO) in 2001.

"The bill does not intend to put restrictions on foreign companies, nor will China change its plan of drawing more foreign capital via reform and opening-up and boosting competition between domestic and foreign companies," Liang said.

Experts agree that the tax change is actually a commitment to the WTO for equal treatment to enterprises, which can only strengthen China's responsible role and make it more attractive to foreign investment.

Joseph Lee, a tax and business advisory partner of Ernst & Young Beijing, is sure that a ten-percent tax increase will not crush out the zest of foreign investment.

"What weighs in their decision is China's huge market potential. The appeals are not only confined to preferential tax policies," said Lee, who has provided 20 years of consulting service on taxation for multinationals.

Alain Berger, president of Alstom China, told Xinhua that tax advantages are only one of many reasons for their investment in China. "The law will therefore not affect our strategy to continue investing in power generation and rail transport infrastructure."

"Among other elements that attract Alstom to invest in China, I can mention the size of the Chinese market, the infrastructure conditions, the cost and abundance of labor, the level of education etc.," Berger said.

Carlson Wagonlit Travel (CWT), the second largest travel management company in the world, has just declared an ambitious plan of expanding business in China. The past five years has witnessed its sales volume in China up by an annual rate of 34 percent, higher than any of its branches in other places.

"Tax rate does not top our concerns," said CWT President Hubert Joly, adding that what he cares most is how to raise the ratio of Chinese companies among customers from the current two percent.

A research report from the World Bank analyzed that stable political situation, sound economic development, broad market, rich labor sources as well as increasingly upgraded business infrastructure and government service in China are the major factors attracting foreign investment.

Tax incentives are considered less important than transparent taxation and indiscriminate government policies, said the report.

Meanwhile, Finance Minister Jin Renqing said there will be a five-year transitional period to offset the impact on foreign companies.

"The income tax rate will be gradually increased to the 25 percent during this period, and old foreign enterprises can still enjoy tax breaks within a regulated time limit as before," Jin said.

Generous tax incentives have fueled foreign capital influx. China has been one of the world's top destinations for foreign direct investment, taking in 53.5 billion dollars in 2003, 60.6 billion dollars in 2004, and 60.3 billion dollars in 2006 in terms of the amount actually used.

Experts point out the 25-percent tax rate is still favorable compared with those in some countries and regions.

The average enterprise income tax rate is 28.6 percent in 159 countries and regions around the world in which an enterprise income tax is applied, while that in China's 18 neighboring countries and regions is 26.7 percent, according to Jin.

What's more, experts expect the new enterprise income tax rate to exert more influence on the country's economic growth pattern.

Preferential tax policies will be shifted to investment in projects concerning environmental protection, agricultural development, water conservation, production safety, high-tech development and public welfare undertakings, according to the draft law.

It will also spur local authorities, which often offer various tax incentives to lure investors for usually a reckless GDP growth, to head toward a scientific development mode, experts say.

Some multinationals have adapted their business plans to the policy change. GE (General Electric) China has announced it will invest 50 million U.S. dollars in its Shanghai-based technology center for products serving environmental protection, including more efficient airplane engines and wind power generators, seawater desalination technology, and energy-saving bulbs.

Steve Bertamini, chairman and CEO of GE North East Asia, packed the new series of products into the idea of "eco-imagination", saying the "green" business will become China's most booming industry in the future.

By the end of last year, China had approved the establishment of 594,000 foreign-funded enterprises, with actually used foreign capital of 691.9 billion U.S. dollars Last year, foreign companies paid 795 billion yuan (101.9 billion U.S. dollars) of various taxes, about 21.12 percent of China's total tax revenue.

In this sense, domestic companies contribute to the bulk of taxes. Official calculation is the new rate will make the annual income tax collected from domestic companies shrink by 134 billion yuan (16.8 billion dollars).

Despite an income tax increase of foreign companies of about 41 billion yuan (5.1 billion dollars), the state coffer will face a reduction of 93 billion yuan (11.6 billion dollars) in taxation.

Still, China's fast growing economy, improved competitiveness of businesses and growth momentum of fiscal revenue have convinced tax and financial officials that the country can afford the loss.

Source: Xinhua