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Chinese Official Says Higher Taxes Will Not Affect Foreign Investors


A Chinese official says a pending new law set to raise taxes on most foreign enterprises will not have a major impact on those company's profits - at least not for the near future. And he predicts it will not scare away foreign investment. Daniel Schearf reports from Beijing.

In order to encourage foreign investment, China taxes foreign companies at an average rate of 15 percent, while most Chinese companies pay 33 percent. Domestic companies have long complained about the higher tax rate, and next week, their complaints are expected to be answered.

The Chinese legislature, the National People's Congress, is all but certain to pass a new law that would unify the taxes paid by most foreign and domestic enterprises, at 25 percent.

But Chinese Finance Minister Jin Renqing, speaking to reporters Friday on the sidelines of the NPC's annual session, said the higher taxes would be no reason for foreign companies to worry about their bottom lines.

Jin says the law, if passed, would take effect on January 1, 2008, but would give foreign firms already operating in China a five-year grace period before the 25-percent level is enforced. He also says he doesn't expect the law to discourage new foreign investment.

"I believe the high profitability of foreign enterprises in China…will not be affected, and investment by foreigners will not be affected at all," he added.

Jin says companies paying the 25 percent rate will have the choice of phasing in the higher rate over the five-year grace period, in two-percent-per-year increases, to slow the impact on revenues.

The law will allow exceptions for high-technology enterprises, which will stay at the 15% tax rate, and for small, low-profit enterprises, which will only see their tax rate rise to 20 percent.

Jin did not specify how small a company has to be or how low its profits before it qualifies for the 20-percent rate.

The corporate tax law will also allow a deduction for companies that invest in equipment that helps improve work safety, protect the environment, and lower energy and water consumption.

China has made reducing energy consumption and pollution emissions a major theme of this year's NPC, although no drastic new measures have been announced.

Jin says the government is considering instituting a fuel tax that would help to lower energy demands and air pollution. But he says the government does not want to increase the tax burden on ordinary consumers, and will first reform road-use fees.

Jin says higher taxes on foreign enterprises would produce about an additional $5.5 billion per year. But he says the lower tax rate for Chinese companies means the overall government take from businesses should actually go down.

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