The Possible Effect Of The Combination Of Two Corporate Income Tax Rates On China's FDI Attracting

Economic globalizing is developing at an accelerating pace. At the same time, international direct investment has reached an unprecedented scale. Particularly, competition for FDI (foreign direct investment) has been intensified among countries all over the world in recently years. FDI is regarded as an important means to boost one country's economy in both developed country and developing country. In China, after its openness for over 30 years, it wins the worlds eyes in attracting FDI. China is one of host countries that attract the largest FDI. This is largely attributed to the preferential tax policy for foreign investors adopted in China. However, with the changes of global economic environment and the development of China's economy, the harmful effect of super-national-treatment granted to foreign investors is evidenced more and more serious. In the new market-economic developing stage, the focus of China's foreign investment attracting policy has transferred from the amount of FDI and the increase of GDP to the overall quality of FDI. Moreover, China is in the process of overall optimizing its investing environment. Thus, the government issues The Corporate Income Tax Law (Draft) timely, with the intent to further regulate and guide the foreign investment and then improve the quality of FDI.This paper attempts to analysis the possible effect of the combination of two corporate income tax rates on China's future FDI attracting.First of all, this paper gives an overview of the preferential tax policy for foreign investors and its characteristic, analyses its harmful effect and then deduces the necessity of the combination of two corporate income tax rates, namely the foreign-owned corporate income tax rate and the domestic corporate income tax rate. After that, this paper introduces terms concerning foreign corporate tax in The Corporate Income Tax (Draft), presents a deep insight into some major adjustments over the former tax law.Next, this paper discusses the possible effect of new tax law on China's FDI attracting from the following aspects. First, this paper provides an empirical model using panel data from 1990 to 2005 of five Economic Special Zones and 14 coastal opening cities. Our model shows that the former preferential tax plays a significant role in China's FDI attracting. However, its importance is weakening as the improving of China's political and economic environment. Second, this paper examines short-term and long-term effect of the combination on China's FDI attracting. Third, this paper analyses the effect of the combination on the home countries/districts and the quality of FDI.Finally, this paper makes suggestion about how to perfect the foreign investment attracting policy.