China today unveiled details of its first corporate income tax for foreign businesses that apparently gives American oil companies the protection they claim they need before bidding for offshore drilling rights next year in the oil-rich South China Sea.
Oil companies have been reluctant to enter the bidding process -- now scheduled for February -- until Peking adopted a tax code that would allow them to be credited in the United States for taxes paid in China. Otherwise, the oil firms argue, they would face double taxation on the same profits.
The new tax law, which is being studied by China's parliament, is believed to satisfy U.S. Internal Revenue Service requirements for "tax creditability" by assigning oil firms the same tax rate that is applied to other businesses. Earlier proposals reportedly set higher tariffs for big oil.
The official New China News Agency said the corporate taxes would apply "to all foreign enterprises, including oil firms, regardless of nationalities and trades . . . Thus a foreign enterprise may credit the tax it pays in China against the tax to be paid to its own government."
"This looks like a good start," said an oil executive based in Peking. "There aren't going to be American oil companies in China unless the Chinese taxation is creditable. No sovereign country will allow oil firms to make enough profit to pay taxes in two countries."
China has regularly consulted with IRS officials in the past year to resolve the tax issue, which has held up bidding for offshore drilling that Peking expects will eventually result in heavy oil production to earn foreign exchange and fuel the nation's economic modernization.
Details of the new tax code were revealed by the Chinese news agency after a session of the National People's Congress, China's rubber-stamp legislature that is slated to formally adopt the proposed law within the next few days.
Provisions for oil companies planning to bid for exploratory rights in waters lying off China's southeastern shores are just part of a comprehensive tax code that would impose a graduated rate ranging from 20 to 40 percent tax on profits earned by all foreign firms doing business in China.
American business executives here said the rates were steep compared to some Asian investment havens, but they appeared to be within reason as long as Washington considers the Chinese law "creditable" and allows the firms to substitute Chinese for American taxes.
If the new code helped allay fears of big oil, it raised new concerns for companies that do business in China but have no office or resident representative here. The law would levy a flat 20 percent tax on income they derive from interest, dividends, property leases and royalties.
That apparently means that a bank that lends China money, even though it has no representative living here, would have to pay taxes on interest earned on the loan -- a practice that foreign tax experts say is highly unusual and an exercise of very broad tax jurisdiction against foreign firms.
Firms without local representatives that license technology to China in exchange for royalties also apparently would fall into that category, said foreign tax experts, a development that could slow Peking's quest for technology transfers to help modernize its economy.