In an effort to woo foreign investors, China has long given out sweetheart tax deals that allow most Sino-foreign joint ventures and wholly-owned foreign enterprises to pay a maximum tax rate of 7.5 percent to 18 percent of their profits. Hong Kong-listed H-share firms also enjoy these preferential rates.

Meanwhile, domestic companies are paying hefty corporate tax rates of up to 33 percent.

Analysts initially had expected that the tax rates would be unified shortly after China joined the World Trade Organization in December 2001, in line with the WTO's insistence on equal treatment for foreign and local firms.

But discrimination in favor of foreign companies is not expressly prohibited by the WTO, which is more concerned to see that domestic firms do not enjoy unfair advantages.

Domestic companies can do little but wait. ``We hope a new tax regime will come out as soon as possible as it can reduce our tax rate, especially when the fuel cost pressure on power producers is so high,'' said Chen Zongfa, deputy director of department of finance with China Huadian Corporation.

After years of delay, market watchers had hoped to see the tax rates unified this year, probably at 24-26 percent of corporate profits. But the issue was not on the agenda of the National People's Congress (NPC) this month. Proposed changes in state laws must be discussed by the NPC before they are approved.

Analysts see tax reform as urgent to create a level playing field.

``As far as the state-owned enterprise reform is concerned, how can their competitiveness be strengthened when they have to pay a higher tax rate?'' BOC International executive director Anthony Lok said. ``It's abnormal, but companies with foreign investment are pressuring the country.''

Foreign companies are aware of the potential risks of tax reform. Some 54 companies - including Microsoft, Siemens, Sony and Ericsson - will submit a report to the State Council asking for a grace period of five to 10 years, state media reported.

Accountants warned that any change in the tax regime should be approached cautiously to avoid dissatisfaction among foreign enterprises.

``Many foreign companies invested in China in early 1990s because of the low tax rate while helping boost economic growth. They may feel trapped if tax holidays or benefits were taken away while their costs of investment, such as property prices and salaries, have gone up,'' said Jane Hui, a partner with Ernst & Young.

Huang Jian, the chief accountant of Huaneng Power International, an H- share company, said reform ``will exert a big impact on the firm'' as its income tax rate should jump from 18 percent to 25 percent by 2008.

But those who are paying 33 percent tax eagerly await the change.

Hui said analysts expect the new legislation to ``grandfather'' existing tax breaks, meaning companies would continue to enjoy the tax holidays they were given when they first invested. .

BOC International's Lok suggested that sectors such as autos, pharmaceuticals, technology, transport and utilities will be hurt while financials, property and telecoms will benefit when the legislation is passed.

The State Administration of Taxation has been sending drafts of the legislation to the State Council, but none were approved.

The slow progress in reforming business tax over the past decade could be attributed to the difficulties of balancing the interests of different parties.

Apart from the interests of foreign-invested firms, those of provincial and municipal governments are too significant to ignore. ``Local governments worry the reform will reduce their tax income, weakening the economies,'' Peking University professor of economics Wang Yuesheng said.

The central government gives a portion of the tax revenue from companies to the corresponding provincial and municipal governments.

gladys.tang@singtaonewscorp.com