Impact of New Enterprise Income Tax Law on Foreign Investment Enterprise
Impact of New Enterprise Income Tax Law
on Foreign Investment Enterprise
Writer : 杜云霞
After the implementation of New Enterprise Income Tax Law (hereinafter as “New Tax Law”), the tax rate is 25% for all enterprises in China, which increase the burden of taxation to foreign investment companies. This article will analyze the impact of New Enterprise Income Tax Law on foreign investment enterprise from the respect of tax rate, standard of tax withheld, Preferential Tax Treatment.
Tax Rate
New Tax Law unifies the tax rate as 25% to local and foreign investment enterprises, which reduces the burden of tax to local enterprises. At same time, to the foreign investment enterprises which enjoy the low preferential tax rate, the burden of taxation increase a little, but this rate is still lower than the average in the world. According to the calculation to the investigation material concerning the tax fund of enterprise income tax, the average actual tax burden of local enterprises is about 25%, the actual tax burden of foreign investment enterprises is 15%. The unification of tax rate means that the difference of taxation between local and foreign investment enterprise is closed. The preferential tax treatment to foreign investment enterprise because of the particularity of investment source will be cancelled.
Standard of Tax Withheld
New Tax Law regulates that: the Reasonable expenses that are relevant to the income actually incurred and obtained by Enterprises, including costs, fees, tax payments, losses and other fees may be deducted from the taxable income.
For foreign investment enterprises, some cost can be deducted according to actual amount before the implementation of new tax law, but now the cost will be deducted within limit. For example, In relation to the expenses from charitable donations incurred by Enterprises, the portion within 12% of the total annual profit may be deducted from the taxable income. Before, the advertising expenses can be deducted according to actual amount, but now the portion within 15% of total amount can be deducted. Therefore, after the unification of standard of tax withheld, the amount deducted to foreign investment enterprises descend and the taxable income increase, so the actual tax burden increases. But unification of tax withheld also enlarge the cost deduction to foreign investment enterprises. For example, before, the Research and development expenses can be deducted within 50% of total R&D expenses, now, this standard increase to 150%. This change favors the foreign investment enterprise to research and develop the high-tech.
III. Preferential Tax Treatment
New tax law unifies the preferential tax treatment to local and foreign investment enterprises and performs the new policy, i.e. “preferential tax treatment to industry is leading, and territorial preferential tax treatment is secondary”. The main objective of which is to advance the technology innovation and development, to encourage the investment on agriculture, basic establishment, protection of environment, energy-saving and safety in production.
New Tax Law also regulates the transitional measure to the foreign investment enterprises which enjoy the preferential tax treatment before: Enterprises set up with approval prior to the promulgation of New Tax Law that enjoy low preferential tax rate in accordance with the old tax laws and administrative regulations may, pursuant to the provisions of the State Council, gradually transit to the tax rate 25% within five years of the implementation of new Tax Law. Where such enterprises enjoy regular tax exemption and reduction, the treatment continues to apply until expiry after the implementation of new Tax Law. However, those that fail to be entitled to this treatment by reason of not making any profits, the preferential period shall be calculated from the year this Law is implemented. High and new technology enterprises that are set up in a specific zone in accordance with the law for the purpose of external economic cooperation and technology exchange and that are newly set up and require key state support in the region of special policy of such region specified by the State Council may be eligible for transitional treatment.
In general, New Tax Law increases the tax burden to foreign investment enterprises. Although, increase of tax burden to foreign investment enterprise will effect negatively to the attraction of foreign investment, but the relative stead social politic environment, lower cost of labor force, large internal market in China etc. advantages are attractive to foreign investors. And, to foreign investment enterprise within the scope of high-tech, they can not only enjoy the preferential tax treatment, but also according to the standard of tax withheld of new tax law, the tax burden can be decreased more, which advance these enterprises to improve their competitive strength in high tech and participate in the competition in the world.