Be careful about what you ask for, the saying goes, because you might get what you want. For years, U.S. and other multinationals have been asking China to "level the playing field" for non-Chinese companies. That means bringing Chinese practices fully in line with those of the World Trade Organization, which China joined in 2001.

That is about to happen in the realm of corporate income taxes. Effective Jan. 1, China's new tax reform bill will erase almost all tax preferences for non-Chinese companies. The changes will bring China in compliance with WTO regulations that insist that foreigners and local residents be treated the same way.

Now that tax reform is around the corner, however, some are warning that it could provide more risks than opportunities for U.S. and other non-Chinese companies. "This is a major change that has traps for the unwary," said Jeff Olin, national managing partner, international taxes, at international accounting firm Grant Thornton LLP. "This is a complex reform, and there are more losers than winners."

The new law will bring Chinese corporate tax rates up to a standard 25 percent, and will end the practice of offering different rates for foreign and domestic companies. Until recently, domestic companies paid a rate of approximately 33 percent, while many foreign companies paid just 15 percent and often less, after locating in dozens of special zones that offered tax holidays. The low rates and holidays were negotiated by foreign companies with local authorities who competed to attract investors in an effort to promote employment.

China's new tax reform reflects the Chinese government's conviction that its tax revenues have not grown at a rate that fully reflects rising foreign investment and trade with China. It also asserts the authority of China's central government over provincial authorities who offered these low rates. "Over the past few years, these tax concessions have become harder to negotiate," Olin said, "but we were still able to obtain them for clients."

All that will soon end. Olin said China's central _government has the perception that taxpayers around the world are "avoiding their fair share of taxes."

The reform will also affect tax treaties that China has entered into, particularly its revised treaty with Singapore and its treaty with Hong Kong, said Peter Huels, managing director, Asia Pacific, at BDP International, the Philadelphia-based logistics and transportation company. The Hong Kong treaty "opens some interesting planning opportunities for Hong Kong residents working in China, due mainly to different definitions of tax residency, as well as differences in tax systems," Huels said.

The big winners from China's tax reform, Olin said, are companies involved in high technology and in research and development. These companies will pay taxes of only 15 percent. Olin said this preference is another indication of China's desire to encourage the production of goods further up the value chain. In addition, a grandfathering provision stipulates that non-Chinese companies that had five-year zero-tax holidays will pay no taxes for the next two years, and then pay 50 percent of the usual corporate tax rate for the following three years. Other sectors favored by continued tax deductions will be agriculture, forestry and fisheries.

For all that, the full impact of the reform will not become clear until after its detailed implementation rules are made public later this fall. "The paradox is that we don't have detailed implementation guidelines about how this will be implemented," Olin said. He expects those rules to be issued by Nov. 1, but they could be delayed until December. "Most of the regulations have been released and are being discussed in many tax forums, within and outside China," Huels said. "Like all new tax regulations, many of the provisions have not been tested in the courts, so no precedents are available."

Olin said the top issue for compliance with the tax reform is transfer pricing; the prices that non-Chinese companies charge their Chinese subsidiaries for such products as royalties, management fees and interest charges. The Chinese apparently believe that many non-Chinese companies are overcharging their Chinese subsidiaries in an effort to minimize their tax liabilities in China. To assure the authorities that they are not doing so, non-Chinese companies will be required to keep detailed documentation showing that their subsidiaries aren't being overcharged for components and services supplied from outside China.

Transfer pricing provisions will affect not only charges for the transfer of manufactured goods but also management fees and debt charges to Chinese subsidiaries. For example, if a U.S. company supplied an executive to manage its Chinese subsidiary, Chinese authorities will want to be assured that the U.S. parent company did not overcharge its Chinese subsidiary for the executive's services, leading to lower profits in China.

"Transfer pricing is nothing new, and the documentation is similar to that already required in the U.S., Germany, Australia, the U.K. and other sophisticated jurisdictions," Huels said. But he added, "All foreign companies need to pay attention to transfer pricing in dealing with related parties. More and more tax authorities are becoming increasingly vigilant in scrutinizing these transactions. Most multinational tax planning involves transfer pricing in one way, shape or form, and China likewise will view this as an opportunity to increase its tax revenues."