Under current rules, the district can offer 50 per cent discounts to investors compared to other places. But Beijing wants to wipe the slate clean and put into effect the same across the board.

Shanghai (AsiaNews/SCMP) – Shanghai authorities and the central government are debating whether to eliminate the favourable tax rate for foreign companies in the Pudong district—China's economic hub—and thus potentially make the city a less attractive place to invest.

The change, if enacted, would be another sign that Shanghai's favoured position has weakened since former President Jiang Zemin, who is from the city, left office more than three years ago.

Shanghai, which is currently under attack for a scandal over the mismanagement of its pension fund and its handling of measures to slow property speculation, has offered tax breaks for years to attract foreign companies as it sought to turn Pudong district into the nation's financial and commercial hub, with the support of the central government.

Foreign companies in Pudong now pay 15 per cent tax. Firms elsewhere in the city pay 27 per cent or 33 per cent. However, with Beijing planning to 'unify' the corporate tax rate for foreign and domestic companies as early as 2008, the debate has taken on new urgency.

Most domestic companies pay 33 per cent income tax, higher than many foreign companies. The reform would set a new rate for all firms, most likely of about 25 per cent, tax analysts say.

Shanghai would like to preserve the special treatment for Pudong, either by maintaining a corporate income tax level below the new rate or implementing a 'grandfather clause' which would preserve the current rates for a period of time, such as five or 10 years. Another possibility would be to make Pudong a special economic zone (SEZ) like Shenzhen to preserve the current tax rate—if the SEZs are allowed to retain preferential tax rates.

However, such a change could further strengthen the relationship between Pudong and the central government at the expense of Shanghai. Pudong already shares tax revenue directly with the central government.

A spokesman for the Pudong district government denied knowledge of any possible change. An official with the district's investment department said the decision lay with the central government.

Whatever happens, many foreign companies are already looking outside Shanghai, driven away by high land and labour costs.

By the end of last year, Shanghai had attracted cumulative foreign direct investment of nearly US billion, and another US0 billion in contracted investment, official figures show. But the pace of growth in investment has been slowing since the nineties. 

• china
• shanghai
• pudong
• economic
• zones
• tax
• system
• special
• status