Foreign firms face tighter controls

Foreign-invested enterprises (FIE) will have to minimise tax costs as mainland authorities take steps to ensure their tax base after the country joins the World Trade Organisation.

Transactions between FIEs that are sister companies under the same multinational group could be subject to double taxation, PricewaterhouseCoopers (PWC) said yesterday.

Mainland tax authorities have noted signs of possible profit manipulation between FIEs. They have found many have reported persistent losses but continue to expand their operations.

Some FIEs have reported wildly fluctuating profits.

The accounting firm said authorities suspected FIEs may be engineering losses with a practice known as transfer pricing, by 'buying high from and selling low to' related parties to avoid tax.

The government was concerned transfer pricing had become a convenient mechanism for FIEs to avoid tax and repatriate profits without declaring a dividend. To counter it, PWC said tax authorities would attribute extra income to the FIEs.