Fundamental Enterprise Income Tax Reform in China: Motivations and Major Changes

In March 2007, the National People\u27s Congress of China promulgated a new Enterprise Income Tax Law (EIT Law), which takes effect on 1 January 2008 and is the first law in Chinese history that imposes an income tax on all forms of enterprise. It replaces the current FIE Income Tax Law applicable to enterprises with foreign direct investment and the Interim Enterprise Income Tax Regulations applicable to Chinese-owned enterprises. Most notably, the EIT Law abolishes the tax incentives available only to foreign-investment enterprises and introduces a general tax rate that is internationally competitive. The promulgation of the EIT Law symbolizes the maturity of China\u27s tax policy, its commitment to the principles of the World Trade Organization, and its confidence in its economic development policy. This article provides some background on this fundamental tax reform and an overview of the key changes and their implications. The article also considers the evolution of the current tax system, examines the motivations for promulgating the EIT law, and discusses the major changes in the tax rules and policies. In conclusion, the article comments on the preliminary impact of the reform