In 1994 China implemented a major reform of its industrial and commercial tax. However, some problems still exist. For instance, in the levy of value added tax (VAT), which accounts for over 40% of total tax revenue, many problems remain. Also, for legal entity income tax, there is only one standard according to common international practice, but there are two in China, one for domestic entities and one for foreign entities (enterprises with foreign investment and foreign enterprises). Foreign entities are entitled to many concessions in their income tax.

　　With joining in the WTO (World Trade Organization), Chinese tax system is facing another big challenge. In recent years, taking the opportunity offered by the reform of state enterprises, private enterprises entered some new fields which are only open to the state enterprises before, and made a quite great progress. Under this background, people voiced the claim of “unify the income tax of legal entities”. National treatment principle is the focus of the debate. In another word, the question is whether the difference of income tax between domestic entities and foreign ones is against the national treatment principle of WTO?

　　1. A debate about national treatment principle

　　Generally, there are two opposite opinion on this issue. Some scholars hold the point of view that the difference between domestic entities and foreign ones in our income tax system which gives more tax preference to the foreign entities, is in contravention of the national treatment principle. And this measure actually establishes an exceeding national treatment. Furthermore, this policy made a gap between the domestic enterprises and foreign ones, and enterprises with foreign investment and foreign enterprises enjoy so much benefit though this policy. In fact, many domestic entities establish fake foreign entities to enjoy the tax preference. The Public Revenue and economic system are all suffering from this jugglery for many years.

　　However, some people do not agree with this point of view. In their theories, based on the definition of “national treatment”, the tax preference for foreign entities does not collide with national treatment principle of WTO. For example, it always employs “no less favorably” to explain the meanings of “national treatment”. It means tax preference for foreign entities, which is based on the fundamental economic situation and policy tendency, is not restricted to national treatment principle.

　　2. The definition of national treatment principle

　　2.1 general definition of national treatment principle

　　Before we discuss whether the tax preference is against the national treatment principle of WTO, it is necessary to analyses the definition of this principle firstly. Generally, what is called national treatment is established with the development of global trade and international trade treaties. Following this principle, the states contract to treat natural persons and legal persons of other states as same as the domestic ones. For instance, OECD definite this principle as following: "National Treatment" is the commitment by a country to treat enterprises operating on its territory, but controlled by the nationals of another country, no less favorably than domestic enterprises in like situations. This commitment is enshrined in the Declaration on International Investment and Multinational Enterprises, adopted in 1976 by the Governments of the OECD Member countries.

　　2.2 national treatment principle of WTO

　　As to the national treatment principle of WTO, it is different from the general definition. It is not appropriate to directly employ the general definition in this study. WTO is an international organization, and all the norms lie in the efficient legal documents. Any analyses of national treatment principle of WTO should rest on the study of documents. No doubt the national treatment principle has an general definition with relatively certain meanings, but when we should apply this principle is not so clear in WTO system.

　　 At the present time, there are several norms on tax in WTO system including national treatment on internal taxation and regulation. This principle is prescribed in Article III of GAAT(1994) as followings:

　　The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production.

　　The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1.

　　Obviously, “products” is the key word of this article. What is called internal taxes contain the taxes on import products and domestic products. In another word, it only focuses on the taxes charged to products, excise and value added tax in China, rather than taxes charged to entities. The other taxes, for instance income tax for entities, are not necessarily subjected to this norm.

　　3. Conclusion

　　All in all, the tax preference enjoyed by enterprises with foreign investment and foreign enterprises is not against the national treatment principle of WTO, even is irrespective of this principle of WTO. Frankly, the legal documents of WTO have never focus on this problem.