The Influence of New Enterprise Tax Reform on Foreign Invested Enterprises in China—Based on Computable General Equilibrium (CGE) Analysis

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.