A draft enterprise income tax law will be submitted to the full session of the National People's Congress in March 2007. If adopted, the law will eliminate or reduce many of the tax incentives previously available to foreign-invested companies and introduce a unified corporate tax rate of 25% that will apply equally to both domestic and foreign-invested enterprises, although for certain qualified small enterprises and "non-resident" enterprises, the rate will be 20%. Currently, foreign-invested manufacturing companies operating in China for at least 10 years are entitled to tax holidays starting from their first profit-making year; those located in various technology or economic development zones are subject to 15% to 24% income tax rates, instead of the nominal 33%; and "export-oriented" and "technologically advanced" foreign-invested companies enjoy a 50% income tax reduction. Under the proposed new regime, available tax incentives would mainly be industry based to encourage investment in such areas as high-tech businesses, infrastructure improvements, environmental protection and energy conservation. To ease the impact on existing foreign-invested enterprises, current tax holiday benefits will likely be grandfathered in and a transition period (reported to be five years) has been proposed during which the income tax rate will be increased gradually. The earliest date for the law to come into effect will be sometime in early 2008.
China's legislature is also slated to enact a new Labor Contract Law. Key features of the current draft of the proposed law would: (1) limit noncompete agreements to senior managers and employees with access to the employer's trade secrets; (2) require companies to inform the trade union of the reasons for termination of any employee and require notice to the labor bureau for anticipated layoffs of more than 20 employees or 20% of the workforce, which would only be permitted in limited circumstances; (3) encourage the use of collective contracts and require negotiation with employee representatives on changes to certain company regulations; and (4) stipulate employer severance obligations.