The China Economic Review reports:

Shanghai and the central government are at odds on plans to eliminate the favorable tax rate for foreign companies in the Pudong district, the South China Morning Post reported. Foreign companies in Pudong pay 15% tax, while firms elsewhere in the city pay 27% or 33%. Shanghai has offered the tax break as part of an effort to turn Pudong into the nation's financial and commercial center, but has been in a long-running debate with the central government over unifying city tax rates.

Pudong accounts for a quarter of the city's economic activity, a third of its foreign investment and half of its trade. The issue has taken on increased urgency as the country moves closer to unifying corporate tax rates for foreign and domestic companies, possibly from as early as 2008. Shanghai would like to preserve the special treatment for Pudong, either by maintaining a corporate income tax level below the new rate or implementing a "grandfather clause" which would preserve the current rates for a period of time, such as five or 10 years. The intensified debate also comes as Shanghai comes under pressure from the central government over the mismanagement of its pension fund and its handling of measures to slow property speculation.

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