07/13/2005, 00.00

Keeping tax breaks for foreign companies

Assistant Minister of Commerce Chen Jian is worried that rising costs, lack of raw materials and Asia competition might lead to a drop in foreign investments.

Beijing (AsiaNews/SCMP) – China will continue to offer important tax breaks to foreign investments not available to domestic businesses. "We must continue to grant foreign-invested companies preferential treatment and maintain a long-term and stable policy towards the foreign-invested business sector," Assistant Minister of Commerce Chen Jian said in a press conference yesterday.

Foreign-invested enterprises have been playing an increasing role in promoting the China's economic development. Without such preferential treatment, the country would be less attractive to foreign investment.

The nominal corporate income tax rate for domestic companies is 33 per cent, while that for foreign-funded companies is only 15 per cent.

Unifying the tax rates has been on the central government's agenda for years, but heated debate among various departments last year prompted the withdrawal of a draft law prepared by the taxation authority and the launching of a new round of consultations.

According to Mr Chen, the mainland "could not just rely on its advantages of a huge market and cheap labour to lure foreign funds, given that it also had disadvantages—rising costs and a shortage of natural resources".

The country, in his opinion, still needs foreign investment which brings technology transfers and management expertise. Otherwise, there is a risk that it might go elsewhere.

But when China joined the World Trade Organisation (WHO) in 2001, it pledged to equalise tax treatment for foreign and domestic companies.

Yet for Chen, China's current tax policy is not in breach of WHO rules.  "Our neighbouring economies have granted ... much more preferential treatment to foreign-invested companies," he said.

Still, the mainland topped the world as a destination for foreign direct investment, attracting US$ 60 billion last year.

Foreign-invested enterprises employed 24 million people last year—10 per cent of the mainland's on-agricultural labour force.

And over the years, the mainland has received more than US$ 584 billion in foreign direct investment.

By the end of May, the number of foreign-invested enterprises reached 525,378.

According to Asian Development Bank figures, in 2004 China attracted more than five times as much foreign investment as South-East Asia as a whole and almost 14 times more than India.

However, in the first five months of this year, overseas investment fell to US .6 billion, a 0.8 per cent drop, China's Ministry of Commerce reported on its website. But contracted foreign investment, or investment pledged but not yet used, rose 19 per cent over last year.

"There's an oversupply problem, with profits being squeezed," JPMorgan economist Frank Gong said. "Those sectors with no oversupply, such as railways, are very hard for foreigners to get in and there is still a lot of government intervention, which may make them unattractive." (PB)

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