The final result depends on a set of detailed regulations to implement the draft bill, which is expected to be developed by the State Council.

Generous tax incentives for foreign enterprises have fuelled foreign capital inflows into China, but the dual income tax structure also spurred domestic enterprises' calls for rights similar to their international counterparts.

Finance Minister Jin Renqing openly called the current tax regimes 'too complicated,' saying that 'a unified tax code will create a taxation environment that favours fair competition among all ventures registered in China.'

The unification of income taxes is not expected to result in severe FDI losses, but the reform is likely to reduce the inflow of "fake FDI," which is money that flows out of China before returning disguised as foreign investment.

China has been one of the world's top destinations for FDI. It received inflows totalling US$53.5 billion in 2003, US$60.6 billion in 2004 and US$60.3 billion in 2005.

However, looking at top foreign investment sources shows that the British Virgin Islands and Cayman Islands ranked among them for several years.

"Although investors from some other countries registered there to take advantage of low taxes, quite a number of them are Chinese business people," Lu said.

Fake FDI is estimated to be around 10 per cent of the total actual foreign investment in China. The abolition of favourable treatment for foreign investment is expected to reduce the percentage of fake FDI.

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