Beijing to step up tax evasion campaign after US multinational firm caught

The mainland's first major case of cross-border tax evasion involving a large US multinational has been revealed by state media, with Xinhua saying Beijing would step up its fight against international tax evasion.

The Hong Kong government would be expected to assist Beijing in stepping up the fight against cross-border tax evasion, Joe Chan, a partner at accounting firm EY, said.

A US multinational had admitted tax evasion and its mainland subsidiary had agreed to pay the central government 840 million yuan (HK$1.06 billion) in back taxes and interest, as well as more than 100 million yuan in additional taxes a year in the future, Xinhua reported on Sunday.

"Because the amount involved is huge and the impact is enormous, this case has been called China's first major anti-tax evasion case," it said. "This case highlights the common tactic of multinationals to avoid tax, by transferring profits through various countries, taking advantage of differences in their tax rates."

The state news agency did not name the company, identified only as M, but said it was a "globally well-known company that has long been among the world's 500 biggest firms", headquartered in the US, and had established a wholly-owned foreign enterprise in Beijing in 1995.

US software giant Microsoft did not reply to South China Morning Post inquiries about whether it was the company involved. The Fortune 500 company set up its wholly owned China subsidiary in Beijing in 1995. In 2012, the US Senate alleged Microsoft reduced its 2011 US tax payment by US$2.43 billion by using an international network of foreign entities and loopholes in US tax law.

For six years, M accumulated losses totalling more than 2 billion yuan in China, yet its peers enjoyed a profit margin of more than 12 per cent in the Beijing market, Xinhua said. That prompted an investigation by the mainland tax authorities that found M's behaviour "unreasonable", Xinhua reported.

The tax authorities were now looking into setting up a system to monitor the profits of multinationals, Xinhua said.

"Following the announcements of the G20 summit, China will fully participate in the international efforts to combat tax evasion, and raise its level of fighting tax avoidance according to the rule of law," it said. "Undeniably, some Chinese anti-tax evasion laws are prone to abuse, and the nation's supervision capability and human talent face many challenges."

At the G20 summit in Brisbane, Australian Prime Minister Tony Abbott announced the G20, of which China is a member, was on track to deliver all the programmes of its Base Erosion Profit Shifting action plan to combat tax evasion by the end of this year.

Hong Kong could be expected to cooperate with Beijing's efforts to combat international tax evasion because Hong Kong had a tax treaty with the mainland that included the exchange of tax information, Chan said.

"There will be more requests from China for Hong Kong to provide tax information," he said. "Hong Kong is trying to give an image of transparency to the international community. Hong Kong cannot be regarded as a conduit to assist tax evasion."

Hong Kong is a logical link for potential cross-border tax evasion, because many multinationals have factories on the mainland and offices in Hong Kong, Chan explained.

Additional reporting by Bien Perez