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OECD Investment Policy Reviews: China 2003

Progress and Reform Challenges

image of OECD Investment Policy Reviews: China 2003

China has become one of the world's leading destinations for foreign direct investment (FDI) since the Chinese government opted to reform the economy and open it to foreign trade and investment. Inflows of FDI, which accelerated at the time of China's accession to the WTO in 2001, have been an important factor in promoting rapid economic growth and technological progress. However, there remains substantial potential for a greater inflow of long-term, high-technology, high-value-added FDI from OECD countries.

This study records and evaluates the development so far of an enabling environment for FDI and suggests policy options designed to improve it further. Foreign investors were initially attracted to China by cheap land and labour, the promise of a large market and, to some extent, by fiscal incentives. To sustain and increase large-scale FDI inflows, it is now necessary to move towards a more strongly rules-based attraction strategy, based on structural elements which will include a sound legal system, transparent laws and regulations, streamlined investment approval procedures, good corporate governance, effective competition policy and a sound financial system.

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The Tax Treatment of FDI in China

Tax legislation regarding foreign-invested enterprises (FIEs) consists of a complex system of tax incentives to attract foreign direct investment (FDI). It is not easy to obtain complete information on the tax liability of an FIE, partly because of regional differences in incentives. FIEs contribute about 10 per cent of all tax revenue. Separate laws govern income taxation of domestic enterprises (which are subject to a 33 per cent corporate income tax rate) and FIEs (which are subject to a 15 or 24 per cent rate, depending on factors including location). There are plans to merge the two tax régimes. The effect of such a merger would depend on the level of the single rate of tax that would then apply to both domestic enterprises and FIEs. Domestic enterprises would no longer be able to benefit from “round-tripping”, i.e. the practice of investing in China via shell companies in Hong Kong or other foreign locations...

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