Tax crackdown reaping rewards in China
Successful recovery of multinationals' unpaid taxes attributed to international co-operation
Chinese tax authorities' increasing co-operation with other countries has resulted in a huge increase in the recovery of taxes dodged by multinationals on the mainland, say analysts.
The amount of unpaid taxes by multinationals recovered by mainland authorities jumped 75 times to 34.6 billion yuan (HK$43.84 billion) last year from 460 million yuan in 2005, said Su Xiao Lu, a former official at the State Administration of Taxation.
"Tax avoidance by multinationals on the mainland is a serious problem, said Su, who is currently a tax consultant for multinationals in China.
The huge increase was partly due to the administration's increased co-operation with overseas tax authorities, said William Chan, a partner at Grant Thornton, an audit and tax advisory firm.
"The State Administration of Taxation has implemented various measures to detect and investigate avoidance cases," Chan said.
One of the measures taken by the government is to participate in a global tax information network, said Su.
In August, China signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters along with other Group of 20 nations. This is an initiative of the Organisation for Economic Co-operation and Development to prevent the artificial shifting of multinationals' reported business to low-tax or no-tax jurisdictions.
Other reasons for the big jump in tax recovery include the taxation administration's tougher monitoring of multinationals throughout the country as well as the growth of multinationals' transactions on the mainland, said Chan.
"Tax avoidance methods by multinationals are getting increasingly complex and well-concealed. The State Administration of Taxation has urged all tax departments to step up efforts to investigate tax avoidance," Su said.
"Tax avoidance is mainly done through transfer pricing. Currently, cross-border transfer pricing is a major focus in the fight against tax avoidance," said Su, seen as a pioneer in transfer pricing in China's tax system.
Transfer pricing involves pricing goods and services transacted between related firms or departments. Transfer pricing enables multinationals to book net profits in different nations and jurisdictions before the profits are taxed.
It is a legitimate tool for tax deferral, which is to park profits in low-tax jurisdictions, said Patrick Yip, deputy tax managing partner at Deloitte Touche Tohmatsu. When the profits are repatriated to the mainland, they are subject to Chinese taxes, said Yip. "However, any legitimate tool could be abused."
The number of tax avoidance cases that were concluded on the mainland was 175 in 2012 and 207 in 2011, said Su. That is a fraction of the total number of foreign-invested firms on the mainland, which exceed 400,000, he said.
The reason for the small number is the taxation administration's limited inspection capacity, Su said.
China's first case of abusing treaties to avoid taxes involved a US firm that wholly owned a subsidiary in Barbados, a tax haven. The Barbados subsidiary set up another subsidiary in Xi'an, the capital of Shaanxi province. The Barbados subsidiary sold shares in its Xi'an subsidiary to another mainland firm for 774 million yuan, netting a profit of over 400 million yuan for the US firm.