The new enterprise income tax law [EIT Law] that came to effect on January 1 has led companies in the PRC to recalculate their business strategies and structures so as to operate with less cost burden under the new rules.
Enacted in March 16 last year, the new EIT Law consolidates both the Enterprise Income Tax Law for domestic corporations and the Foreign Enterprise Income Tax Law, leveling both domestic and foreign enterprises' tax rate to 25% from 33% previously. Those who used to enjoy less than the 25% tax rate will be granted a five-year period for them to gradually adjust to the new 25% rate.
Brendan Kelly, tax partner and head of Baker & McKenzie's Shanghai tax practice, said the goal of this law is to remove some of the incentives that historically were put in place to help drive foreign investment, where they are not needed anymore.
"I think the attitude of the Chinese authorities is that there have been enough changes in regulatory terms as a function of China's accession to the World Trade Organization to free up the market and to give access to foreign investors, so there is far less need to give special incentives to foreign investments" he said.
The burden for foreign-funded enterprises might be higher than before. However, Kelly believes that the tax law will not have much impact on foreign interest as the country still has huge potential for investment.
"The real question right now," Kelly said, "is whether this is going to be enough of a drive that changes people's investment decisions, and that remains to be seen," he said.
Under the new law, some sectors may benefit from it, while most industries need to take up the burden. High-tech industry, infrastructure, and agriculture, for example, are among the few that will be stimulated by the implementation of the law. On the other hand, the real estate sector can enjoy a tax reduction to 25% in comparison to a 33% tax rate, the rate that they were previously required.
Nevertheless, the new law will have a significant impact on the manufacturing sector, in which companies used to have a 15% tax rate and a two-year tax exemption, which has now been changed to 25%, while other incentives such as a tax holiday are removed.
"I think what China is doing is that instead of being a manufacturing-based country, they want to be slightly more selective about what kind of investments they actually want in China, such as high-tech manufacturing and high-tech enterprises," Kelly said.
Anthony Tam, Deputy Tax Managing Partner for Southern China of Deloitte, said the law will benefit the nation's domestic enterprises. Local companies, he said, will become more competitive by enjoying the same tax rate as foreign enterprises. Both the increase in competition and the shift of industrial focus will certainly help drive the economy, he said.
However, the lack of transparency in association with the transition into the law has caused frustration among enterprises and investors. Joseph Tse, Tax Managing Partner of Deloitte Greater China said that various governmental bodies involved are still debating policy issues affecting important portions of the new law. "As a result, there are a number of important areas where the Rules are silent and future guidance is to be expected. Examples of these important areas include additional details on incentives, particularly on the qualification for the 15% concessionary tax rate of high & new technology enterprises, the treatment of enterprise restructurings, and the application of the new general anti-avoidance rule," he said.
"You want to be able to make investment decisions and to know what your tax rate is going to be. You also want to know how quickly rules will change so that you can make the transition from one approach or model to another based upon those changes. It's difficult to plan appropriately due to the lack of transparency and notice with respect to many of these rules," Kelly said.