Five years after China's entry into the World Trade Organization (WTO), the much-awaited draft of Corporate Income Tax Law was finally tabled to the Standing Committee of the National People's Congress, the country's top legislature, for the first read yesterday.

This legislative move marks an important step forward to improve tax equity in line with China's integration into the global economy.

By introducing a unified corporate income tax, such a tax reform will enable the country to not only better tap foreign investment but also create a level field in terms of taxation for domestic firms and foreign companies to compete fairly.

To advance its market-oriented reforms, China has adopted an opening-up policy about three decades ago in the belief that foreign investment will greatly contribute to economic growth by bringing in much-needed technology, capital and management expertise.

The country has done so well in attracting foreign investors that it has become the top destination for foreign investment among developing countries for more than a decade.

The long-term growth of the Chinese economy must be the major driving force behind accelerated inflow of foreign funds. China's rise as a global manufacturing centre as well as a vast consumer market has only attracted more foreign investment since its WTO entry in 2001.

Meanwhile, the tax incentives foreign investors have been enjoying also help expand inflow of foreign funds. From 1994, China began to levy a 33 per cent tax rate on both local and foreign companies, but investment incentives can effectively cut foreign firms' tax rate to 15 per cent or less.

The contribution of foreign investment to economic growth is obvious. Foreign-funded enterprises created a huge number of jobs and substantially boosted exports. However, as the country increasingly realized the necessity to pursue sustainable development, the tax incentives granted by investment ownership have definitely become incompatible with present needs.

The Chinese Government is resolved to bring a fundamental change to the extensive growth pattern.

Therefore, foreign investment that delivers energy-saving and environment-friendly growth will be more welcome than ever before.

And investment that does not contribute to higher energy efficiency and environment standard should no longer be encouraged by tax incentives.

Besides improving the country's use of foreign investment, a more far-reaching significance of the new law is that it enables all businesses in the country to compete with each other on an equal tax footing.

The draft proposed to set the unified corporate income tax rate at 25 per cent for all enterprises.

Foreign-funded companies do not necessarily worry too much about the unified tax rate though their complaints are largely understandable. An equal taxation is crucial to the improvement of business climate in China.

Source: China Daily