A NEW law which increases income taxes on foreign firms in China will be phased in over five years to cushion the blow, Finance Minister Jin Renqing said Friday.

The draft law, introduced to the 3,000-member National People’s Congress (NPC) on Thursday, unifies income tax rates for domestic and foreign-funded companies at 25 percent.

The change will raise the collective tax bill for foreign companies by 43 billion yuan (US$5 billion) but Jin said the law prescribes a five-year phase-in period.

“Taking into consideration the transitional period, that will mean in the first five years (foreign firms’ taxes) will only increase by about 8 billion yuan every year,” Jin told a press conference on the sidelines of the annual session of the NPC, China’s parliament.

The full text of the draft law, set to go into effect Jan. 1, 2008, has not yet been released to the public.

Currently, foreign firms pay just 15 percent tax, while Chinese companies pay 33 percent, a legacy of past policies that sought to encourage foreign investment to kick-start China’s economy.

Due to the slow phase-in, Jin said he does not expect the change to significantly impact foreign profits or dampen enthusiasm for investing in China.

“I believe the high profitability of foreign-funded enterprises in China will not be affected and I think the enthusiasm of foreign investors will not be affected,” he said.

Foreign-funded corporations paid 795 billion yuan in various taxes in 2006, or about 21 percent of total tax revenue in China, according to official figures.

Nobel prize-winning U.S. economist Joseph Stiglitz echoed Jin’s views in comments carried earlier by the Xinhua news agency.

“China, for a very long period of time, has imposed a much lower corporate tax rate on foreign firms than on their Chinese counterparts. For me it makes no sense,” said Stiglitz, a visiting professor at Beijing’s Renmin University.

“The tax burden has put domestic companies in an unfavorable position.”

With China now a magnet for overseas investment, Stiglitz argued it was unnecessary to continue to offer preferential policies to attract foreign capital.

Jin said implementation of the law would not affect certain industry-specific preferential tax rates, such as incentives enjoyed by high-tech companies.

Nor will it affect various tax breaks extended to certain industries for finite time periods.

“We will continue the range of preferential rates. Those firms can continue to finish their preferential terms during the transitional period,” he said.

Jin said the law will reduce tax revenues by about 100 billion yuan per year but it was important to create a level playing field and the government expects continued economic growth to eventually make up the shortfall.

(SD-Agencies)