'The last special policy is done. Over.'
MARCH 8-The pin on a gloomy Li Youwei's chest indicates that he participated in the Chinese People's Political Consultative. The 69 year-old member of the Consultative's standing committee was the first party secretary of Shenzhen province.
In 1990, after Li had just been appointed vice-governor of Hubei Province, he had an encounter at the capital airport with a member of the Central Committee of the Chinese Communist Party, who mentioned special economic zones. Not knowing what special zones were, Li was told to look it up when he got home.
A few years later he became the Shenzhen party secretary, where he remained until he stepped down in 1998.
What Li calls 'the last special policy' is the preferential 15 percent income tax enjoyed by foreign-invested firms in special economic zones.
On the morning of March 8, Jin Renqing, director of the Ministry of Finance, under commission by the State Council, presented the new income tax law to the 2,000-strong Congress. Jin discussed how the new tax would integrate foreign and local firms, and that its immediate passage would be beneficial.
'I knew there was no going back,' Li admitted a few hours later.
During the session, Li and ten other officials signed a draft resolution calling for the saving of the preferential tax.
One party secretary, one party mayor, and two provincial leaders-- all deeply interested in Shenzhen's economic developments-- contacted ten members of the CPPCC seeking their signatures on a resolution advocating to maintain the preferential tax.
Li believes that if the tax rate changes suddenly from 15 percent to 25 percent, the continuity of the SEZ policy will be disrupted and it will be an SEZ in name only.
The group also believes the adjustment will affect Hong Kong's recent boom. They expressed concern that if the tax rate exceeds Hong Kong's 17.5 percent, the favorable trade relationship between Hong Kong and Shenzhen will be disrupted, and that they will both become less internationally competitive.
The group points out that these kinds of taxes are not just in-line with China's current economic plans, but also with international practice, and that regional economic development policy trends are cohesive with the reality of China. Li Suowei mentions how Russia, in the year before last, passed a law covering special economic zones. India is also an example.
'Despite world trends, we are taking a step back,' says Li.
The group's draft proposal seems to take into account current popular momentum for the adjustment, and says that if the preferencial tax must be cancelled, 'We should wait for an opportune moment.'
The Time is Right
'With our financial institutions' strong ability to adapt, we should learn from international tax reform and and take this opportune moment to reform our own taxes,' Jin told the Congress.
Liu Kegu, a finance and taxation expert, tells us that now is the best time to merge the two tax laws. For the past few years, the economy has grown rapidly, with macro-level supply and demand being basically equal and economic structural reforms going forward. Government revenues have been consistently and rapidly increasing for several years. With the world economy developing smoothly, there is also a good international environment.
'Those involved with the Special Zones have reacted intensely,' says the resolution prepared by the group. When asked what foreign firms have said about the proposed change, Li responded, 'Is there really any need to ask?'
On March 7, Huang Huahua, a Congressional representative and governor of Guangdong province, held a press conference with the Guangdong delegation, where he responded to our questions by saying, 'The integration of the two taxes will have both positive and negative consequences, but, overall, it is more beneficial than not.'
Hua says the Chinese government will focus preferential treatment on industries rather than regions. Furthermore, tax rates are not a deciding factor in a business' development. And compared to other countries, our taxes are still slightly low. The average tax rate of 159 countries in the world is 28.6 percent, while our average tax rate is 26.7 percent. A move to 25 percent for these firms will still be slightly lower than elsewhere.
Foreign businesses have had a light response to the law. The Japan Business Federation, Japan's largest business organization, conducted a survey that found 80 percent of businesses would not be affected. The director of the Federation went so far as to say, 'For the long term development of business, letting both domestic and foreign businesses compete on a level playing field is reasonable. Giving preference to foreign firms might make sense in the short term, but in the long term it will cultivate laziness and decrease in competition.'
Huang Huahua told this newspaper that Shenzhen's SEZ will still enjoy a transition period where preferential treatment, where the 15 percent tax rate remains.
One member of the Congress said that the group's interest in the SEZ is understandable and that their attention to the bill is worth respecting, but that they have not fully considered everything.
Li is afraid that the integration will affect development in the SEZ, specifically the service sector.
Li is also pushing forward a draft resolution that will establish protective tariffs in the Yangtze River Delta, the Pearl River, and the Huan Bohai economic areas.
However, Li does not know whether the central authorities will consider it.
