Chinese Enterprise Income Tax Reform and Advices

...

- Problems resulted from double-track EIT system

- The disunity is lack of standardization and contrary to equitability of taxes

It is not proper to Chinese market-oriented economy, which requires objective developing. For the local extra aspect, it is a discrimination policy to domestic companies, so they are easily to generate power races between local and central government. Duplicate taxation, disguised tax or fees are easily appeared if one of these governments cannot get expected fiscal revenue. Enterprises may somehow get heavier tax bearing and evade taxes.

- Different treatments and policies could lead tax evasions and tax avoidances

As foreign-invested enterprises have lower tax bearing than domestic ones, the domestic enterprises trend to find some tricks to get tax evasions and tax avoidances. For instance, they are likely to change their ownership to foreign-invested by faking joint venture or cooperation, or find the most proper location to establish enterprises, which has negative effects to government policies.

And some other enterprises use tax reduction policies as cover of tax evasions and tax avoidances. For example, some enterprises get high-tech enterprise certificates by illegal ways to get tax reduction, however, they do not have practical conditions to become technology innovation. [Note III] So the government and third-party institutions have to do extremely strict certificate authorization and examination.

- Increase tax costs, decrease tax efficiency

Government tax department will adopt different policies to adapt to different enterprises, obviously, the tax revenue costs will rise and efficiency will decrease. Corruption and malpractice may easily appear in tax bureaucracies, making negative effect to both enterprises and the government.

- Unreasonable income tax bearing

From the investigation of Chinese stock market of 2015, the largest constitution part of tax payable of listed companies’ financial report is EIT (47%), next are operating tax (13%) and VAT (4%), as following charts show:

[Chart III]

[pic 3]

[Chart IV]

[pic 4]

What’s more, from [Chart IV], we can also conclude that the rate that EIT/ PROFIT BEFORE TAX has been increasing since EIT Reform in 2008. When Chinese economy have been facing downward pressure, and stepping into ‘’New Normal’’, the heavy text bearing will exist in a long term so that may be negative to both enterprises’ profit and the government fiscal revenue.

- Industry directivity

Because the government have obvious directivity towards different industries, traditional industries now have much heavier tax bearing than newly-developing industries. Using Chinese stock market annual report data of 2015 as example ([Chart V] s following), electronic & technology, national defense, media and agricultural have lower tax bearing, while manufacture industries, such as petrochemical, steel, real estate and coral have the highest tax bearing. This chart shows a structural problems especially about traditional industries.

[Chart V]

[pic 5]

---------------------------------------------------------------

- PART IV ADVICES AND OPINIONS

Although problems still exist in EIT, we cannot ignore the government’s efforts about it. During the NPC & CPPCC meeting in Match, President Li Keqiang informed that the tax reform of this year shall two too main aspects: one is enlarge the scope of small and medium enterprises who qualified to enjoy EIT reduction and preference, and rise the R&D expenses weighted deduction. These policies show that the government are effort to decrease structural EIT bearing. But in short term, problems will exist and need public to help.

From our aspect, we still have some advices and opinions to present as some replenish.

- The government should focus on some specific industries and provide policy supports

TMT (technology, media and telecom) industry is the most fast develop industry since 21th Century. From [Chart VI]. the analyze of TMT industry, we can also conclude that industry increase is the main way to get fiscal revenue. To find new increase points, the government should do some efforts such as:

- Encouraging scientific and technological innovation,

- Conducting Industry structure reform,

- Supporting specific industries by government policies.

[Chart VI]

[pic 6]

- Make tax reduction and exemption policies be practical

To avoid and decrease negative effects of tax evasions and avoidances, the government should focus on two sides: one is check on the qualification of tax reduction, such as rely on other bureaucracies, for instance, rely on China Securities Regulatory Commission’s effort when enterprises go to IPO; Another is to focus much more on small and media enterprises, put an end to disguised tax, tax changed to fees to insure their living space.

- Moderately decrease EIT rate

International environment also can stimulate Chinese tax reform. After Donald Trump had announced that American Corporate Tax rate would be decrease to 15% in his campaign's policy. We also suggested that decrease EIT rate from 25% to 22% is an appropriate way to boot the economy and defend manufacturer and capital flight. If EIT rate were decreased for 3%, based on practical tax rate of Chinese stock market enterprises is 21%, the calculated net profit increase rate would rise from1.8% to 5.8%.

- Adjust current enterprise income tax base

Consider the worldwide average standard, China has a higher leverage tax base. Chinese tax deductible parts do not contain some international normal parts such as dividend, bonus, royalty fees and some FA depreciation. So, the government should focus on these items and present some beneficial policies for enterprises to decrease current