China's Enterprise Income Tax Reform Study

On 16th, March, 2007, the Enterprise Income Tax Law of People's Republic of China, which is due to come into effect as of October 1, 2008, has been approved with a high vote rate at the Fifth Session of the Tenth National People's Congress. This is a milestone to symbolize the incorporation of two sets of enterprises income tax systems, as well as the commencement of a brand new stage of foreign capital utilization.Originally starting at early 1980s and coming into being in 1994 after the tax reform, the coexistence of two sets of enterprise income tax systems has certain inevitability due to the policy needs under the specific situation, when China's economy was not very developed and the comprehensive investment environment was very poor. So far, making enterprise income law especially for foreign invested companies has been approved to be substantially effective and contributive to China's economic development and its establishment of social market economy.However, as the advancement of China's opening up and reform as well as the increasing internalization of our economy, the shortcomings of the coexistence of two sets of enterprise income tax systems have gradually gained wide attention, which leads to an increasing appeal for tax reform. The conditions for reform on the enterprise income tax system have become mature. The publish of the Enterprise Income Tax Law of People's Republic of China is a token for the incorporation of the coexistence of two sets of enterprise income tax systems, as well as China's entry into a historical new stage of foreign capital utilization.This thesis reviews the history of the coexistence of two sets of enterprise income tax systems, uncovers the inevitability of the incorporation of the two systems and its feasibility based upon a thorough analysis on the drawbacks. As far as the concern that the rising of the tax rate may lead to the outflow of foreign capital, this thesis uses John Dunning's OLI theory to make a thorough analysis. And it draws a conclusion that the favored tax policy is not a determinant but just an incentive. Due to China's location advantages, our attractiveness to foreign capital will not be harmed and the amount of foreign capital will not be reduced in the long run. The new enterprise income tax law will help to improve the quality of introduced foreigncapital, optimize the economic structure and promote a sustainable, harmonized and healthy economic development. At the end, the thesis comes up with suggestions for a smooth transition from the old system to the new one, and highlights the importance of improving the soft investment environment for foreign capital to cooperate with the new system, together to commence a brand new stage of foreign capital utilization.