China Stepping Up Scrutiny of Tax Evaders

Beijing is going after base erosion and profit shifting, and multinationals could get caught in the crosshairs.
Matthew HellerFebruary 4, 2015
China Stepping Up Scrutiny of Tax Evaders

China is continuing to step up its efforts to curb what it sees as cross-border tax evasion by foreign-owned companies, announcing it will review how companies move money and allocate costs among their Chinese operations and their overseas businesses.

While such a review could also be applied to Chinese businesses that have set up holding companies in the Cayman Islands and elsewhere to avoid taxation, The New York Times says the main target of Beijing’s latest tax-collection initiative appeared to be foreign-owned firms.

“The focus right now is multinationals paying their fair share of taxes,” Howard Yu, a corporate tax partner at PwC in Beijing, told The Times.

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The State Administration of Taxation disclosed the review on its website Tuesday. China Daily, a state-run newspaper, warned that “multinationals, especially small, foreign companies, should pay extremely high attention to their regulation compliance, as failure to do so would lead to huge losses.”

As Forbes has reported, China used to offer all sorts of preferential treatments to foreign companies as a way of encouraging investment. But “the tide has turned,” with Beijing announcing in December that it was going after “base erosion and profit shifting,” a tactic that allows foreign firms to move their China profits to countries with lower taxation rates.

“Current international taxation regulations can no longer stop cross-border tax evasion,” Zhang Zhiyong, deputy director of the State Administration of Taxation, said at the time.

The Times noted that one issue in Chinese tax policy is the country’s generous treatment of businesses in Hong Kong, which Britain returned to Chinese sovereignty in 1997. China has a 10% withholding tax on dividends paid from businesses in China to parent companies in most other countries, but the tax is only 5% for dividends sent to Hong Kong.

The tax administration said Tuesday it would investigate whether offshore companies in places with favorable tax treaties with mainland China were actually conducting business activities in those jurisdictions that allowed them to qualify for preferential tax treatment.

“The heightened tax scrutiny spells more trouble for multinationals, as they struggle with China’s vigorous enforcement of anti-monopoly regulations,” Forbes warned.

Featured image: Thinkstock

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