Mainland to take a closer look at tax of foreign firms

PUBLISHED : Monday, 01 November, 2004, 12:00am
UPDATED : Monday, 01 November, 2004, 12:00am

The taxable income of Hong Kong firms operating on the mainland is expected to come under greater scrutiny, according to PricewaterhouseCoopers.

It is believed that 'in the near future', the State Administration of Taxation will sign a new tax agreement with the Inland Revenue Department requiring more stringent exchange of information, PwC senior manager Philip Hung said.

'The Chinese government will know how much profits Hong Kong companies earn and vice versa with the Hong Kong government,' he said.

Mainland tax authorities suspect many foreign firms avoid taxes and repatriate profits out of China by buying high and selling low to related parties overseas, according to a PwC paper.

PwC senior manager Rhett Liu cited two cases of companies getting into difficulties with Chinese tax authorities on this issue.

In one case, a contract manufacturer in Shenzhen persistently reported losses since its incorporation and was investigated by the Shenzhen tax bureau in 1998 and 1999. The firm subsequently entered into an 'advanced pricing agreement' (APA) with the Shenzhen tax bureau, whereby prices on future related-party transactions were fixed to avoid the problem of selling low to, and buying high from, overseas related parties.

In the second case, a consumer goods company had its related-party transactions questioned by mainland tax auditors. The tax authorities subsequently raised the prices of the firm's related-party transactions above what the company previously stated, thereby increasing the firm's tax liabilities.

On September 20, the government introduced regulations on transfer pricing - the prices charged on transactions between foreign firms in China and related parties overseas. The rules, comprising 33 articles in eight chapters, are much more comprehensive than the previous version, which consisted of just one sentence.

Relatively few foreign firms had entered into an APA with mainland tax authorities, PwC tax partner Spencer Chong Tsz-nam said. PwC recommended that Hong Kong firms should do so to avoid problems.