Mainland China tax audits seen as 'unfair'

Survey finds that firms plan to allocate more resources to taxation management in China

PUBLISHED : Tuesday, 08 April, 2014, 1:08am
UPDATED : Tuesday, 08 April, 2014, 1:08am

The mainland's taxation has not kept pace with the demands of its fast-changing economy and companies rate the country's tax system as one of the most complex, unpredictable and inconsistent in Asia Pacific, according to a recent poll by Deloitte Touche Tohmatsu.

"China has not been very successful in reforming its tax regime in tandem with its economy," said Danny Po, the Asia-Pacific and China national leader in mergers and acquisitions tax at Deloitte.

He cited e-commerce as an example. The purchasing and delivery of goods through e-commerce may be done on the mainland, but the electronic transactions may be conducted in servers outside China, Po said. "How to allocate profits between onshore and offshore transactions; this is a big question mark."

William Chan, a partner at audit and tax advisory firm Grant Thornton said: "Like many countries, China is still struggling to come up with new rules to tackle e-commerce as it is so fast moving and unlike traditional business, it is hard to determine how and where to tax e-commerce."

Deloitte's poll of 888 tax executives in 20 jurisdictions in Asia-Pacific found slightly over 100 respondents saying Chinese tax officials were unfair in conducting tax audits. China had the second most respondents saying its tax audits were unfair behind India.

Over 200 respondents expressed low confidence in Chinese courts if their company could not reach an agreement with local tax authorities, which was the highest number of negative views on this question in Asia-Pacific.

The survey found China was expected to be the second most complex tax jurisdiction in Asia-Pacific in the next three years, following India. However, China had the most respondents saying their company will spend more time and resources on tax management in the same period.

"The most important thing for the Chinese tax authorities is to have a consistent approach in the interpretation of national laws and rules," Chan said.

"Navigating the numerous local levies and heavy compliance obligations can be cumbersome for foreign companies. China does not yet have the very sophisticated tax system of many of its trade partners," said Joshua Colman, senior manager of tax policy at Ernst & Young.