Shenzhen moves on tax evasion by foreign firms

PUBLISHED : Saturday, 19 February, 1994, 12:00am
UPDATED : Saturday, 19 February, 1994, 12:00am

SHENZHEN authorities are cracking down on tax evasion by foreign-funded enterprises operating in the city, with 104 companies investigated last year.

A total of 18 million yuan (about HK$15.94 million) of lost tax revenue was recovered from the enterprises which failed to report 250 million yuan of taxable profit.

Speaking at a tax seminar organised by accounting firm Coopers & Lybrand, Shenzhen Tax Bureau official Wang Gang said the most common ploy used by foreign enterprises to evade tax was transfer pricing.

''Foreign investment enterprises have been claiming losses in their operations here. However, few bankruptcy cases have been reported,'' Mr Wang said.

''On the contrary, the enterprises have been expanding their production scale.

''The main reason for this situation is that foreign enterprises make use of transfer pricing to avoid paying tax in China.'' According to Mr Wang, the principal transfer pricing techniques used by foreign enterprises to transfer profit to parent companies include purchasing raw materials from associated companies at inflated prices and selling finished products at an artificially low price.

Foreign enterprises also exaggerate or make up fees paid to associated enterprises, or provide services to associated companies free of charge.

Another technique is to quote imported equipment at unreasonably high prices, or accept loans from associated enterprises at high interest rates.

Some also make use of exchange rate fluctuations to reduce profit to and evade tax.

The Shenzhen tax move is part of a nationwide campaign against fraudulent foreign investors, dishonest exporters and corrupt tax departments which are reported to be depriving the central Government of millions of dollars.

The Government has established a special task force to monitor development of transfer pricing in the country.

Mr Wang said measures adopted by the Shenzhen Tax Bureau in checking transfer pricing started with identifying foreign-backed enterprises which had transactions with associated companies.

The pricing pattern would then be examined to see if it deviated from widespread practice.

If transfer pricing was found, adjustments would be made by tax authorities for a reasonable distribution of profit between associated companies.

To prevent overstatement of service expenses, foreign-backed enterprises are required to provide documentations to support claims, and services provided to associated companies would have to be charged at a reasonable level.

Imported equipment would have to be appraised by the Commodity Inspection and Testing Bureau or by accountants.

Mr Wang said the tax bureau had the power to investigate suspect enterprises' activities for the past three years and, if necessary, 10 years.

Zhang Jiashou, also with the Shenzhen Tax Bureau, said the Special Economic Zone would abide by Beijing's provisional regulations to introduce land value appreciation tax.

A tax rate, ranging between 30 and 60 per cent, is payable on income from the assignment of land-use rights, buildings on such land or other attachments to the land.

Some cities in Guangdong province had suggested they would offer a more favourable version of the regulations to protect the property market.

Edward Shum, tax manager of Coopers & Lybrand, said the land capital gains tax would have a more serious impact on poor and remote regions.

''In these areas, developers would expect a higher return for the higher risk involved, but the new tax would reduce their return on investment,'' he said.