Firms turn to tax advisers ahead of China crackdown


The country is increasing scrutiny of foreign companies

BEIJING: The Chinese government’s vow to increase tax scrutiny of foreign companies has sent firms rushing to tax advisers ahead of the implementation of new rules designed to rein in cross-border tax avoidance.

Tax professionals and business lobbies alike have welcomed the move as an attempt to bring China’s tax regime more in line with international standards.

But it has also caused concern that authorities could use the policy, which came into effect yesterday, as a political tool to put the pinch on foreign companies, on top of what business lobbies lament is an increasingly tough business climate in the world’s second largest economy.

“We’ve definitely been getting a lot of questions from clients on how to avoid being investigated for anti-avoidance measures,” said Roberta Chang, a Shanghai-based tax lawyer at Hogan Lovells.

The measures, an elaboration on China’s existing “general anti-avoidance rule” or GAAR framework, have more companies taking a hard look at how they structure their businesses.

Under the new policy, for example, a firm that invests in China through companies in Hong Kong or Singapore to take advantage of tax benefits that do not exist between China and its home country could find itself on the wrong side of Beijing tax authorities if it cannot prove it has substantial business operations there or employees on the ground.

“Companies are increasingly putting substance in their holding companies,” Chang said.

Andrew Choy, Greater China international tax services leader at Ernst & Young, said the GAAR rules were a signal that companies need to pay attention to tax planning.

“In general, people will be more conservative,” he said.

Chinese regulators hit Microsoft Corp with about US$140mil in back taxes last November, an early case of what could be a wave of “targeted actions” to stop profits going overseas, according officials at China’s State Administration of Taxation.

With a slowing economy likely to reduce 2015 fiscal revenue growth to a three-decade low of just 1%, according to a Deutsche Bank report, it makes sense for Beijing to try to boost its coffers.

Tax specialists said companies needed to be aware that China’s tax regime was evolving, albeit as part of a global trend to curb tax avoidance.

At a meeting of G-20 leaders in Australia in November, Chinese President Xi Jinping endorsed a global effort to crack down on international tax avoidance.

“Compared to the US or the UK, China’s tax rules are still simpler. But China doesn’t want to be seen as an undeveloped country with tax rules. It wants to catch up to other international players,” Chang, of Hogan Lovells said.

At the forefront of evolving international tax policy is the debate about whether the right to tax should be tilted towards industrialised, capital exporting countries where firms reside, or so-called source countries such as China, where many generate significant profit.

“There is a large element from a government policy perspective that has to do with whether China is going to tax particular profits or some other country,” said Jon Eichelberger, a tax expert and partner at Baker & McKenzie’s Beijing office.

Chinese state media have said that tax evasion and avoidance by foreign companies cost the world’s second largest economy at least 30 billion yuan (US$4.8bil) in tax revenues each year. — Reuters


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