China to Crack Down on Tax Collection From Multinational Companies
HONG KONG — China’s tax officials plan to step up efforts to collect taxes from multinational corporations in the latest of a series of moves in the last year, mostly against Western companies. The activities have included police raids on the headquarters of companies’ China operations and heavy fines under antimonopoly law.
The State Administration of Taxation said that it would be looking in detail at how companies move money and allocate costs among their Chinese operations and their overseas businesses. Although such a review could also be applied to the many Chinese businesses that have set up holding companies in the Cayman Islands and elsewhere to avoid taxation, accountants said the main target of the latest initiative appeared to be foreign-owned firms.
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“The focus right now is multinationals’ paying their fair share of taxes,” said Howard Yu, a corporate tax partner at PricewaterhouseCoopers in Beijing. He added that the Beijing office of the national tax agency had set up an international division with an emphasis on auditing multinationals.
The tax agency statement came a day after President Obama proposed as part of his budget a 19 percent tax on future foreign earnings of American multinationals. But China’s stance relies more on the enhanced collection of taxes under existing laws, as opposed to Mr. Obama’s proposal to change the tax code itself, said Paul Gillis, an accounting professor at Peking University’s Guanghua School of Management.
The tax agency announced its plans in a statement posted on its website Tuesday night; the statement was reported by state news media outlets in identical or nearly identical articles on Wednesday. China Daily, a state-run newspaper, included a warning, ascribed to an unidentified “expert in the field,” 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.”
China became a net exporter of investment last year, by some measures. Christopher Xing, a China tax partner in the Hong Kong office of KPMG, said the tax agency was likely to scrutinize some of the Chinese companies setting up operations overseas.
“China is also concerned about Chinese multinationals engaged in unfair practices,” he said.
The tax agency is seeking ways to share more information with foreign tax authorities to help determine where the value of any good was created so it could be taxed there. Officials in China, the world’s largest manufacturer, have long contended that much of the value of a good lies in its physical production, and not in the intellectual property that went into the item, which is often created elsewhere.
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 percent withholding tax on dividends paid from businesses in China to parent companies in most other countries. But the tax is only 5 percent for dividends sent to Hong Kong.
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Beijing has hardened its stance toward Hong Kong in many ways since the Occupy Central protests last fall, when pro-democracy demonstrators occupied three areas of the city for more than two months.
Wealthy Chinese individuals, many with powerful political connections, typically set up their overseas holding companies in highly secretive, low-tax jurisdictions like the Cayman Islands. They then create shell companies as intermediaries in Hong Kong. Profits from mainland companies are paid to the Hong Kong shell companies with only a 5 percent tax, and the Hong Kong shell companies then relay the money to holding companies in the Cayman Islands, according to tax experts.
The tax administration said on Tuesday that its review would include 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.
Like the United States, China uses an unusually broad definition of worldwide income.
James Zimmerman, the chairman of the American Chamber of Commerce in China, said in an email that standardization and simplification of China’s tax code was “constructive and positive” as long as it complied with China’s obligations to the World Trade Organization. But he added that “AmCham-China is hopeful that the Chinese government will apply the tax laws and regulations in a fair, uniform and transparent manner, and we will be monitoring China’s enforcement record going forward on behalf of our member companies.”
On Sunday, China became the latest country to impose a so-called anti-avoidance rule, giving broad authority to the tax authorities to block corporate transactions they deem to be aimed more at avoiding taxes than conducting business.
Andrew Choy, a partner at Ernst & Young, said the rule made foreign companies nervous because unlike in countries like Australia, Canada and the United States, it was nearly impossible in China to challenge the tax authorities’ decisions in court.
