It is generally believed that the corporate income tax (CIT) will be rated at 25% after the coming unification. It is also accepted that this unification will promote the competitiveness of domestic funded enterprises by reducing their CIT. Meanwhile, the foreign funded enterprises will respectively lose their advantage in competition because their formal tax preference of “two-year-exemption and three-year-deduction” will go to the end.

To our opinion, because of the current tax environment in China, these effects won’t appear at least in the near future.

First of all, the positive effect led by reduction of tax rate to domestic funded enterprises won’t be as obvious as expected by the media. Although the CIT on domestic funded enterprises are 33%, their actual tax burden is quite low. In practice, the preferential treatments such as fixed-taxing, financial subsidy, regional tax preferences substantially reduce the tax burden on domestic funded enterprises. Furthermore, there are often illegal methods such as hiding income or recording non-existing expenditures in these enterprises.

Secondly, along with the unification of CIT, many existing tax preference on foreign funded enterprises will be lifted. The tax burden will therefore be increased. But the short-term effect brought by this transformation will be very slight.

1, The tax preferences to foreign invested enterprises are mostly not created by Income Tax Law Of The PRC For Enterprises With Foreign Investment And Foreign Enterprises and other relevant legislation, but by local governments with the method of local policies or government promises. These local methods won’t go out of effect right after the unification of CIT rates, because the need of the local governments to attract investment still exists.

2, Statistics shows, more than 60% of foreign related enterprises are running at a loss. Even those companies who are making money, it is unclear how much they have earned. Loss-making enterprises won’t carry any tax burden, and the profit-making enterprises have also sheltered most of their profit by legal or illegal methods. As a result, no matter what tax rate is, it doesn’t matter very much.

3, In consideration of policy consistency, credit standing of governments, and according to the experience developed in adoption of new rules in the past. Even the CIT is finally unified, there will always be new tax preferences, although they could be limited to certain type of enterprises. And the new tax system will only be applicable to enterprises founded after the adoption of new CIT system. The existing tax preference will continue to be in effect until the end of their duration. Therefore, in the near future, the tax burden on today’s foreign funded enterprises will remain almost the same.