China tightens tax noose on companies with overseas assets

New legislation requires more information on overseas investments to improve tax collection

PUBLISHED : Monday, 07 July, 2014, 5:26am
UPDATED : Monday, 07 July, 2014, 6:43am

Beijing has announced a new regulation designed to improve the central government's tax collection from overseas mainland companies, including those controlled in Hong Kong.

On Thursday, the State Administration of Taxation announced a new rule that required greater disclosure by mainland companies of their overseas investments and income.

The new regulation will take effect on September 1.

"This will boost compliance with tax collection and strengthen risk management of tax collection," the tax administration said.

Becky Lai, an international tax partner with accounting firm E&Y, said: "This announcement is important as China continues to improve its international tax legislation to ensure compliance from taxpayers.

"[It] will allow the China tax authorities to gather additional information on domestic enterprises' offshore investments."

The new regulation required a greater level of disclosure in terms of content, frequency and events by mainland firms on their investments in overseas companies, said Christopher Xing Guo, a China tax partner with accounting firm KPMG.

"This will potentially open the door for more stringent tax collection and enforcement for China companies investing overseas."

Under the new rule, mainland companies filing their annual tax returns are required to disclose more information on foreign entities in which they have a controlling stake of 50 per cent or more, either directly or indirectly.

These included companies in Hong Kong, the British Virgin Islands, the United States and Britain, Xing said.

The level of detail required for annual tax submissions was much greater under the new regulation, Lai said.

A taxpayer would be required to disclose information on any overseas mainland-controlled companies, including their place of establishment and details of additional shareholders in them, as well as their profit distribution, she said.

In the past, overseas investments by mainland companies were reported once a year in their annual tax returns. However, under the new regulation, these companies are required to report any deal involving a 10 per cent shareholding change in a foreign firm in the quarter that deal was made.

Any change in a company's direct or indirect shareholding of a foreign firm above or below 10 per cent must also be reported to the tax authorities in the quarter it took place.

Those that failed to disclose the required information were liable for penalties and tax adjustments, the tax administration said.

"The fines can be hefty under the tax administration laws in China," said Xing, adding that penalties could range from 50 to 500 per cent of the unpaid tax.