Abstract
The law on new enterprises income tax was executed on January 1, 2008. Income tax rate for both domestic and foreign enterprises is 25% in China. This paper establishes a Computable General Equilibrium model to investigate the influence of the new company unified tax rate on foreign enterprises. This paper uses the 2007 national statistical data to calibrate parameters and obtains two equilibriums: benchmark equilibrium and 25% unified tax rate equilibrium. In addition, the influence on foreign enterprises is investigated through comparing the two equilibriums. This paper researches the relationship between unified tax rate and foreign direct investments. Finally, this paper does the sensitivity analysis of the foreign direct investments for the actual foreign enterprise income tax rate and discount coefficients of state-owned enterprises’ return on capital.
Highlights
Since January 1, 2008, the “Enterprise Income Tax Law of People’s Republic of China” has been implemented in China
We find that when the actual income tax rate of the foreign capital enterprise department is higher than 8% and when the government departments’ conversion coefficient of state-owned enterprises is greater than 0.2, unified tax rate 25% will reduce the foreign direct investment
This paper comprehensively analyzes the influence of unified tax rate on the foreign direct investment (FDI), and sets up a general equilibrium model which contains production and consumption
Summary
Since January 1, 2008, the “Enterprise Income Tax Law of People’s Republic of China (draft)” has been implemented in China. China’s overall economy, especially the state-owned enterprises among the domestic funded companies They explored the impact of the new CIT on the social welfare, employment and taxation. We find that when the actual income tax rate of the foreign capital enterprise department is higher than 8% and when the government departments’ conversion coefficient of state-owned enterprises is greater than 0.2, unified tax rate 25% will reduce the foreign direct investment. Both of these approaches can achieve the goal of eliminating inefficient foreigninvested enterprises
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