Chinese firms, which pay 33 per cent, would be "at a competitive disadvantage" if the two-tier tax policy continued, Jin said in a report given to members of the National People's Congress on Thursday.
 

Blanket exemptions

 

The new law would eliminate such blanket exemptions.

 

But Jin said foreign firms would not be "greatly affected" by the change.

 

"The current financial cost for foreign-funded companies will not be greatly affected.

 

"Some foreign-funded enterprises may continue to enjoy preferential tax rates for high-tech enterprises and small low-profit enterprises, and some others may enjoy transitional preferential tax policies," he said.

 

Business groups, which were given a draft of the proposed law weeks ago, said investors were willing to accept the change as long as the new system was applied equally to both foreign and Chinese companies.

 

But it is unclear if Beijing can enforce the new standard in a system where tax collection is run by local authorities who are hungry for investment and offer their own incentives.

 

Tax breaks

 

The new law would allow tax breaks for high-tech projects and other investments favoured by the government.

 

Tax analysts say Beijing is likely to use more carefully targeted breaks to promote energy conservation and to cut pollution.

 

Jin said the proposed changes would lower tax revenues for the government but gave no details and said estimated losses were within acceptable limits.

 

China attracted $60bn in foreign investment last year, raising the total over the past 20 years to $659bn, according to the government.

 

If the new tax law is implemented in 2008, the foreign companies' tax bill will increase by $5.3bn, Jin said, but collections from domestic firms will drop $17.3bn, resulting in a $12bn decline in fiscal revenue.

 

US comments

 

On Thursday, the visiting US treasury secretary said China should open its financial sector further to foreign competition to help it become more than an exporter of low-cost manufactured goods.

 

Henry Paulson said "the risks for China are greater in moving too slowly than in moving too quickly towards transparent, liquid, stable capital markets".

 

China needed to step up the pace of reform for the sake of stability, both at home and globally, he said, adding that China's growth was becoming "increasingly imbalanced" because it was overly dependent on exports.

 

"Financial sector development is the key to China's transition into an economy that is less reliant on industrial activity, produces more high-value-added products and reduces the intensity of natural resources consumption."

Source: Agencies