Basic Thoughts on Reform of China Income Tax Laws
Liu Jianwen
【全文】
The current China income tax laws system is based on the 1994 tax system reform. It is composed of three coexisting parts which regulate respectively individual income tax, income tax on Chinese-invested enterprises and income tax on enterprises with foreign investment and foreign enterprises. This income tax law system has played an effective role in enhancing our economic opening to and cooperation with the world, in safeguarding our national economic rights and interests, and in modulating social income gaps and moderating social unfairness. With China entering WTO and the deeper reform in the socialist market economy system, the not-noticed-yet-still-existing drawbacks of current income tax laws become quite apparent. How shall we carry out this reform? Such an issue becomes a hot topic of the public at the present time.
I.Drawbacks of current China income tax laws
While we are agreeing to the positive effect of the current China income tax laws system, it should be reasonably realized that, due to the economic, political and legal reasons, certain drawbacks still exist strikingly.
i）．Drawbacks of Enterprise income tax law
The enterprise income tax law has enjoyed significant progress with the reform, yet with the development of market economy and the collectivization, regionalization and globalization of the world economy, the drawbacks in the framing of such a Dual-System
enterprise income tax laws system has become apparent with the problems it has been brought about in the implementation, they may be roughly listed as below:
1.The dividing condition of enterprise income tax is unreasonable.
According to the 1994 tax system reform, the enterprises are divided into to classes, i.e. those directly subordinate to the central government and those to the local government, and accordingly, their income taxes are subordinated to the central government and the local government respectively. Such a classification of enterprises is a symbol and an outcome of the traditional planned economy; it lays emphasis on the relationship between an enterprise and the government. This tax-sharing system may render the public a misunderstanding of the relationship between taxation division and partitioning of investment yields, and this misunderstanding imposes as an obstacle to establish an appropriate income tax partitioning scheme.
This tax partitioning based on administrative subordination has led to the fact that sate-owned enterprises may enjoy a particular governmental consideration, which will render a differential system environment for different enterprises and means an intentionally designed unfairness. The central government may manipulate an advantage for those enterprises directly owned by it, while the local government may do the same by a flexible manner for its enterprises. At the same time, the strictness and sanctity of enterprise income tax law is violated as an immediate result. In addition, since the tax partitioning is based on administrative subordination, the tax collection and law enforcement come under the authority of different levels of governments. That will cause those ostensive problems that the collection cost is increased, the competent level of the state treasury will be confused, the enterprises may be disturbed by the cross collection and administration and so on. A deep-seated problem is that every level of government seems to be assured of direct administration of the income tax.
2.The tax collection and administration system for enterprise income tax is far from being scientific.
This can be seen especially in the tax collection and administration system for Chinese-invested enterprise income tax. Firstly, the place of tax payment is not uniformed. The Provisional Regulations for Enterprise Income Tax provides that the independent accounting enterprise shall pay its tax locally, yet it also provides that the industries of railroad, civil aviation, postal service and finance may respectively collect the tax as a unit. The above provisions may lead to some inconvenience and conflicts. Secondly, there are too many kinds of tax-collecting authorities, especially with regard to Chinese-invested enterprises. Concerning such enterprises, the power of collection and administration of the income tax on the non-state-owned ones is allocated to the local tax authorities, whereas the income tax on the state-owned enterprises, nominally collected and administrated by tax authorities, is actually controlled by different levels of revenue organs. This situation will inevitably lead to inconsistency in tax collection and administration and will weaken the tax-collecting function of the authorities.
The dual-system taxation has in effect increased the cost of collection and administration. According to the current situation, most of local tax authorities with a relatively high rank have set up their taxation departments concerning foreign affairs. Though theoretically they carry out a uniform measure for the income tax on both Chinese-invested enterprises and FIEs or foreign enterprises, they actually set up two different systems of organs and rules. That has virtually increased the cost of collection and administration. It also violates the principle of efficiency in taxation administrative and the WTO principle of national-treatment.
3.The relationship between the taxable income and the accounting income is unclear.
At present time, there is a gap between the taxable income and the accounting income. The Provisional Regulations for Enterprise Income Tax and the Income Tax Law Concerning FIEs and Foreign Enterprises have both stipulated that when, applying to its own accounting method, the accounting income of a taxpayer is not agreeable to the applicable provisions of tax law, the income tax shall be determined by the applicable provisions. Yet there are some practical troubles in implementing such provisions: the tax authorities are not capable of establishing a wholly independent standard for the tax counting and collecting. The conflicts between relevant rules and policies are yet to be resolved, especially to the state-owned enterprises.
