Abstract
China’s adoption of an income taxation system for state-owned enterprises in the early 1980’s marked a significant conceptual departure from the past. It represented yet another step away from central- ized socialist control, which had characterized the People’s Republic of China (PRC) since 1949. Prior to the adoption of this income tax system, virtually all of the profits and financing of state-owned enter- prises, by far the largest sector of the Chinese economy, were directly submitted to and allocated from a centralized state budget.
The process of decentralization began in the late 1970’s, when the government began experimenting with profit sharing for state-owned enterprises (irun liucheng) (Profit Sharing System). Under this system, a state-owned enterprise was allowed to retain a portion of its profits before submitting the remainder to the state treasury.
In the early 1980’s, China adopted the reform program known as li gai shui. Literally translated, this term means “the conversion of profits into taxes” (the Conversion). Rather than allowing an enterprise to share only a small portion of its profits with the state, this new system allowed a state-owned enterprise to retain all of its profits after paying income taxes and other assessments. The Conversion sought to increase the legal and fmancial autonomy of state-owned enterprises and to reduce their subordination to and dependency on the government.