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Chinese Enterprise Income Tax Reform and Advices

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MACROECONOMIC POLICY

CHINESE ENTERPRISE INCOME TAX REFORM AND ADVICES

Christian, Kuiyou Zhou

M161209

116120910264

April 2017

  • INTRODUCTION

Since the reform and opening-up beginning in 1977, Chinese tax system has stepped into a new stage. Government gets most of its fiscal revenue from tax, while tax also plays a significant role in macroeconomic regulation and control. ENTERPRISE INCOME TAX (EIT), which is considered as the main component of Chinese tax income, has experienced several reforms and becomes market-oriented and gear to actual circumstances. But as the fast development of Chinese economy and society, Chinese corporate tax has affected some problems and lagging during its implement, reforms are also called on by public and scholars.

In this paper, I will talk about the history and development of Chinese corporate tax, focus on its influence and effects to macroeconomics, find current and potential problems and give advices and implements to solve and enhance it.

  • PART I HISTORY OF CHINESE ENTERPRISE INCOME TAX

Based on official history material [NOTE 1], Chinese government started to levy ENTERPRISE INCOME TAX at year 1950, at that time, EIT is just levy to private-owned enterprises, collectively-owned enterprises and individual household. The most different part from today's policies was that state-owned enterprises handed their profit without pay any EIT. After the tax reform at 1958 and 1973, industrial and commercial tax were introduced to state-owned company, while the hand-in profit was still the main source of government revenue. The situations that the epitome of Chinese planned economy, and the actual ENTERPRISES INCOME TAX (EIT) were not introduced to business until the reform and opening-up in 1977.

From 1978 to 1983, the first income tax reform started during the seventh Five-year plan, mainly targeting on introducing foreign capital and technology. Based on the Income Tax Law of the People's Republic of China Concerning Chinese-Foreign Joint Ventures (1980), enterprise income tax rate was ascertained to 30%, with a 10% extra rate of Local Income Tax. For another independent system of Foreign Enterprise, the Income Tax Law of the People's Republic of China Concerning Foreign Enterprises(1981)stipulated a 5-class progressive tax rate in excess of specific amount within 20% and 40%. These above policies indicated the start of Chinese income tax reform.

From 1983 to 1990, the most important point is to state-owned enterprises was the profit handed over to the state was gradually replaced by paying enterprise income tax. Based on State-owned enterprises income tax regulations of the People's Republic of China (draft in 1984), state-owned enterprises' tax rates were decided by enterprise scale. Medium and large state-owned enterprises undertook 55% proportional tax rate as well as progressive tax rate more than specific amount within 10% and 55% to small state-owned enterprises and collectively-owned enterprises. For private-owned enterprises, the interim regulations on private enterprise income tax of the People's Republic of China stipulated an 35% rate from private-owned enterprises.

From 1991 till now, enterprise income tax is within the frame of the interim regulations on enterprise income tax of the People's Republic of China, which was a part of reform of industry and business taxation in 1994, unified different income tax rate to different kinds of ownership enterprises and made EIT policies more simplified and efficient.

  • PART II CURRENT CHINESE ENTERPRISE INCOME TAX SYSTEM

Based on enterprise income tax law of the People's Republic of China which went into effect in 2007, current Chinese domestic enterprises income tax system has a unified proportional tax rates of 25%, while some enterprises can enjoy the reduction or remission of enterprise income tax in specific situations. For instance, the rate of high and new tech enterprises shall be levied at the reduced tax rate of 15% and enterprise can have a 2-year generous tax holidays at the beginning of its establishment. If the enterprises are related to some specific industries, such as agricultural, re-employment services or social welfare or located in Western Development or poverty area, they shall also enjoy the policy-based different level of tax reduction.  

But for the foreign-invested enterprises, they are still independent with domestic enterprises. With a 33% income tax rate and 3% local extra. These enterprises shall enjoy various tax reduction based on different rules. For the location advance, enterprises located in special economic zones or development areas will enjoy 15% ranging to 24%; For the re-investment or adding registered capital, enterprises would receive a 40% tax returns. For manufacture foreign-invested enterprises, they can adopt the policy of "Two Exemptions and Three 50%-Reductions".

  • PART III DEFECTS AND PROBLEMS IN CURRENT CHINESE ENTERPRISE INCOME TAX SYSTEM

As tax system is served not only for government, but also for public and society, advance with the times is required for it. From today’s aspect to talk about current Chinese enterprise tax system, it is appropriate for the so-called double-track system to domestic and foreign-invested enterprises, but now, this system may be outdated and needed to improve.

  • Current domestic enterprises EIT systems still exist several problems
  1. The differential treatment between state-owned and non-state-owned enterprises are not suitable the establishment of enterprise legal system and modern enterprise system. Different tax bearing resulted from different ownerships somehow makes operation and management form eventually decided by tax policies rather than practical operation and management. And this system can also hamper modern enterprise system reform for current economic situation in China;
  2. The rights and obligations of tax payers are still not clear. Enterprise Income Tax Law does not stipulate detailed special the rights and obligations of tax payers about enterprise income tax system, means that enterprises do not have proper legal basis; We find some local government force enterprises to prepay EIT for the next period to finish current fiscal revenue target [NOTE II], however, this policy will eventually harm the government’s profit, somehow is just like making the rice shoots grow by pulling them up.  
  3. The practical tax bearing of domestic enterprises is too heavy. Benefited from foreign company tax deduction and exemption policies, foreign enterprises have a 25% practical income tax bearing, while domestic enterprises have 25% without beneficial policies. These differences are not appropriate to establish fair competition. From [Chart I], we use other countries’ data as contrast, we can conclude that China hosts the highest rate of enterprise tax / total tax, which is as high as 91.2%, much higher than some developed countries such as United States and Japan.

[Chart I]

 [pic 1]

[Chart II]

[pic 2]

And [Chart II] is the overall tax rate published by The World Bank. China also has the highest rate at 68% than some developing countries such as India. This phenomenon directly indicated that Chinese government strictly rely on fiscal revenue than other countries.    

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