The Impact Of The Unification Of Two Sets Of Enterprise Income Tax Laws On Foreign Direct Investment In China

Over the past two decades, China has experienced consistent and steady economic development. The socialist market economic system has gradually been established, infrastructure is ever nearer completeness and the investment environment has improved substantially. But there remain questions as to whether the tax preference remain effective, and whether the implementation of a new set of Enterprise Income Tax Laws which reduce the general preferential level of tax policies for foreign-invested enterprises will result in a marked negative impact on Foreign Direct Investment (FDI) in China?This paper begins with a look at the motivation behind FDI and tax preference. It argues that the stipulation of new set of Enterprise Income Tax Laws will not downsize the general volume of FDI in China tremendously. The sound macro-economic climate in China is still attractive to foreign investors; FDI growth in China is persisting.In an empirical study, the paper first compares the impact on FDI into China resulting from the adjustment of tax preference and changes in the macro economic environment. It then undertakes a comparative study of the relationship between tax preference and the scale of FDI, based on the Inward FDI Performance Index and the regression model. Finally, it presents a review of FDI into China over the nine months following the unification of the two sets of Enterprise Income Tax Laws. This study shows that compared to the changes in the macro-economic environment, the adjustment of tax preference has had a rather short-term and weak influence on the flow of FDI into China. Especially since the beginning of the 21st century, tax preference have had fairly limited effects on FDI into the coastal cities and regions with advanced economies. There is no correlation between tax preference and foreign investment. The new set of Enterprise Income Tax Laws has enhanced rather than weakened the scale and confidence of foreign investors, who fundamentally pay more attention to the standardization, legalization and consistency of tax policies in the host country. The new set of Enterprise Income Tax Laws has been accepted by most investors. If the current sound macro-economic environment can be maintained, the growth momentum of FDI into China will continue.The paper concludes with an analysis of the impact of the unification of the two sets of Enterprise Income Tax Laws on the future development of FDI in China.