China drafted into global tax battle

Beijing endorses multilateral effort against evasion, with impact from the plan hatched by G20 and OECD likely to be felt in Hong Kong

PUBLISHED : Saturday, 20 July, 2013, 12:00am
UPDATED : Saturday, 20 July, 2013, 5:17am

The mainland will take part in a multilateral action plan to fight tax evasion devised by the G20 and the Organisation for Economic Co-operation and Development (OECD), which is expected to have a significant impact on the mainland and Hong Kong.

Patrick Yip, deputy national mergers and acquisitions leader at financial firm Deloitte Touche Tohmatsu, said it was an important move and probably the first time Beijing had joined a multilateral effort to combat aggressive tax evasion.

The OECD unveiled its action plan to tackle tax evasion by multinationals yesterday. All Group of 20 nations were expected to join the initiative, OECD tax director Pascal Saint-Amans said.

"The G20 nations agree this action plan is good to address non-taxation," he said. "It's an ambitious action plan. There is the political impetus to move there. The countries are strongly asking for this."

China is a member of the G20 but not the OECD.

The OECD has 34 member nations, mostly developed countries including the United States, Britain, Australia, France and Japan.

The action plan would better align tax in a location with the economic activity in that location, the OECD said in a report.

It aimed to prevent the artificial shifting of multinationals' reported business to low-tax or no-tax jurisdictions like Bermuda, British Virgin Islands (BVI) and Cayman Islands, Saint-Amans said.

We have US$2 trillion of profits in offshore havens like Cayman Islands and Bermuda

"Companies in Bermuda are managing hundreds of businesses," he said. "You have no business in Bermuda. We say this is wrong and want to fix it. We have US$2 trillion of profits in offshore havens like Cayman Islands and Bermuda."

The plan would require tax havens like Bermuda to disclose in a more transparent way the tax information of multinationals to the governments that taxed them, Saint-Amans said. The action plan also contains measures to neutralise the various methods multinationals use to minimise their tax by "transfer pricing", which is booking their profits among different tax jurisdictions.

"China has already endorsed the action plan," Saint-Amans said. "We are now establishing a mechanism to get all G20 countries on an equal footing to implement the action plan, that is, write recommendations for the plan, which will take 18 to 24 months. China has been invited to participate and is expected to join in the coming days."

The OECD tax action plan contains a framework where OECD countries will contribute details and regulations over the next two years, with all G20 nations expected to contribute as well, Saint-Amans said. "The golden era of 'we don't pay taxes anywhere' is over," he said.

"The impact on China will probably be to increase China's rights to tax, including by neutralising some of the tax channelled through Hong Kong where there is no real activity," Saint-Amans said. "This is one of the reasons why China is supportive of the project."

Yip said: "China is getting more important in the international fiscal tax arena. Now China is so wealthy, it has capital going out. If capital goes out from China to tax havens and no Chinese tax is paid, it would not be favourable to the Chinese government. As a capital-exporting country, China is rightly concerned about this."

Compared with tax havens like BVI, where there are virtually no business operations, Hong Kong would not be so badly affected by the action plan, Yip said, because there was substantial business activity in Hong Kong, for example in trade and banking. "The only thing that may make Hong Kong look less favourable under this action plan is Hong Kong's tax rate is low compared to China's," he said.

While tax havens like BVI have zero tax, Hong Kong's corporate tax rate is 16.5 per cent, against the mainland's 25 per cent.