China to end tax breaks for foreign firms (Associated Press)

Created by : Francis Goodwin View profile

Incentives for foreign investment going away as economy booms

March 4, 2007 -- BEIJING (AP) -- The tax honeymoon for foreign investors in China is ending.

For two decades, China has rewarded new investors with hefty tax breaks, helping to lure the nearly $700 billion in investment that has helped make this the world's fourth largest-economy, but fueling growing complaints by Chinese companies about unfair treatment.

Now, China's legislature is expected to end this special status after it opens its annual session Monday. A law that state media say is expected to be enacted would equalize tax rates, raising foreign companies' tax bills and cutting those for many Chinese entities.

"This special treatment could not continue forever," said Winston Zhao, a lawyer in Shanghai for the U.S. law firm Jones Day who is advising companies on the change. "Foreign investors have to be prepared mentally, though nobody wants this to happen."

The change is part of sweeping efforts to modernize China's laws to keep pace with explosive economic change and meet World Trade Organization commitments to treat companies equally.

It is too early to know what the financial impact will be on foreign companies, say business groups and consultants. But they say major changes in business plans are unlikely, because companies are still attracted by China's low labor costs and 1.3 billion potential consumers.