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4.The effect of the preferential policy on the enterprises income tax is not satisfying.
The purpose of inviting foreign investment is to bring in capitals with advanced technologies and to develop our infrastructure and bottleneck industries. However the Super National Treatment of preferential tax policy on the enterprises income tax provided for the FIEs has not live up to that aim. First, the industrial structure of foreign investment is not rational and the general quality of foreign investment is relatively poor. Those enterprises of foreign investment are almost labor intensive instead of technology or capital intensive ones. Second, the economic disparity between different regions is aggravated. The preferential policy on foreign-related enterprises has evolved a ladder-like income tax rate, i.e. from special economic zones to coastal economic development zones and further to common inland regions, the tax rate becomes higher and higher. There had already been a considerable economic disparity between the eastern and western parts of our country due to historical and geographical factors, this preferential policy will bring about an unfair competition and further enlarges the economic disparity between different regions.
In recent years, the state government has maintained a policy-based support for the western development. In terms of the preferential policies, the western part is enjoying a more favorable support than the eastern part. Yet due to the poor natural conditions and poor infrastructure, the western part is still not able to compete with the eastern part despite the preferential policy on the investment, and this preferential tax policy still can not effectively attract capital from the eastern part to the western part.
5.The occurrence of double taxation infringes on the principle of fairness.
According to current income tax laws system, a company and its shareholders shall be taxed respectively in terms of enterprise income tax and individual income tax. Double taxation hence occurred. This will influence the company’s decisions on dividend or debt
and the likes and consequently do harm to the distribution of resources and the social economic security.
ii）． Drawbacks of individual income tax law
Though the individual income tax law of China has come into the track of general international practice, there are still some parts that do not accord with this track. China individual income tax is not harmonious with international practice in several respects as follows:
1.The item-categorized tax is not suitable.
As to individual income tax, China adopted an item-categorized system and a collection measure of withholding at source since 1980s when it established its first individual income tax law. It was suitable at that time when the individual income was generally low and the collection technique of the taxation organs was simple. With the development of national economy, the individual income is rising to a new level and the number of taxpayers is rising as well. On the other hand, the collection technique of the taxation organs is enhanced a lot. Under this condition, the individual income tax shall function as a method to modulate individual income, and the principle of levying tax based on the actual paying ability of taxpayers shall be paid adequate attention to. The previous item-categorized tax is thus not compatible with this new trend; it does not comply with the principle of levying tax basing on the actual paying ability of taxpayers, and may even violate the constitutional provision of basic living rights.
2.The design and structure of tax rate is not well-proportioned.
According to the international general practice on income tax, the comprehensive income is taxed by progressive tax rates in most countries. Those incomes which cannot be listed into the comprehensive income will be taxed by differentiated proportioned rates. Since middle 1980s the taxation theory of supply-side economist has begun to exert its influence, and the western developed countries, led by U.S., have finished their reforms of income tax law to lower tax rate, to reduce the number of grade of tax rates and to broaden tax base. This reform trend is impacting some developing countries now. As to the current rates of China income tax, there are shortcomings in three aspects. First, the classification of progressive rates levied on income in excess of specific amounts is designed too complicated. Including those individual income taxes on the investors of individually invested enterprises and jointly invested enterprises, this classification is made up of four general categories, whose tax rates are further differentiated. Second, there are too many grades of progressive rates on the income from wages and salaries, and the marginal rate is too high. Third, there is a problem of compatibility between the design of tax rates and the upgrading or degrading of the tax rates and expense deduction. That will bring about the unfair tax burden and the trouble of complicated calculation, especially concerning the income from remuneration for personal service and payment for writings.
3.The taxation treatment is unfair and the deduction of expenses is irrational.
Concerning the Individual Income Tax Law of China, the unfair treatments may be generalized as below: First, the common salary and the remuneration for personal service are treated distinctively though they are both the payment for personal labor. Second, Income from wages and salaries shall be taxed at rates ranging from 5% to 45%, while income from royalties, interest, dividends, bonuses, lease of property, transfer of property and the likes, all of which are not paid for the labor, shall be taxed at a flat rate of 20%. The sharp distinction of tax rate will affect not only the principle of payment on the basis of labor, but also the sense of fair taxation. Third, while dividends and bonuses shall be taxed, the interest of national debt and financial bond is free of taxation. It is unfair in that they are all income from other than labor.
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