Foreign firms face tighter controls

PUBLISHED : Thursday, 27 September, 2001, 12:00am
UPDATED : Thursday, 27 September, 2001, 12:00am

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.

The FIEs may end up paying tax on income which would have already been taxed elsewhere.

The issue became all the more pressing as the number and types of cross-border transactions were expected to increase when China opened industries to foreign investment.

PWC partner Spencer Chong said that in an attempt to reduce tax burdens, the FIEs could move so-called portable profit-drivers to places with lower tax rates.

Portable profit drivers are profit-generating factors that can be housed elsewhere.

He suggested a Hong Kong-invested firm could set up an off-shore company in Macau to house its staff engaged in brand-building, product research and design and market development.

The profits generated by these activities were treated as 'entrepreneur profit' in Macau and were not taxed. However, the offshore firm still had to be incorporated there, hire Macau locals, market its products outside Macau and could not trade in Macau currency.