FAIR COMPETITION

As a step to put domestic and foreign firms on an equal footing to promote fair competition, China enacted a new corporate income tax law that comes into effect on January 1, 2008. Such an effort was the first time since 1978.

According to the law, the income tax rate for foreign companies in special bonded zones, which previously enjoyed a preferential rate of 15 percent, would rise in stages to 18 percent, 20 percent, 22 percent, 24 percent and finally 25 percent, the same as domestic companies, over five years.

The arrangement would apply to such bonded zones as the Shenzhen Special Economic Zone, economic development zones set up in coastal cities such as the Hongqiao Economic and Technological Development Zone in Shanghai, and high- and new-tech development zones, including Zhongguancun Science Park in Beijing.

However, foreign companies that have tax holidays, which provided for five tax-free years and another five years of up to 50 percent reduction, would retain those concessions for the full 10 years before facing the new higher rates.

The 15 percent rate would be retained until 2010 for foreign companies that invested in the central and western regions of China, an apparent effort by the government to re-address regional economic imbalance.

The regulations would include new criteria for high- and new-technology firms that could enjoy a lower 15 percent rate.

In addition to the income tax, China was set to quintuple tax on the use of arable land for non-farming purposes. It would also charge foreign-invested companies as much as their domestic peers in a bid to protect farmland and better control land supply, according to an ordinance released by the State Council.

Signed by Premier Wen Jiabao, the instrument would take effect as of January 1, 2008, and replace the 1987 edition that had allowed foreign-invested companies to be exempt from the land use tax.