New Chinese tax rule to take aim at multinationals’ profit shifting
Move shows that Beijing is joining the global move against diversion of profits to low-tax jurisdictions
Beijing on Saturday posted a new rule on scenarios that could trigger tax-avoidance investigations of multinationals, underlining its commitment to a global move to combat profit shifting.
The new rule, posted on the website of the State Administration of Taxation, comes as China further joins a global effort to stop tax distortion through transfer pricing, or multinationals altering prices of goods and services, intangibles and financial assets within global operations to divert profits to low-tax jurisdictions.
In a nutshell, the tax authority wants to make sure complicated transactions and corporate structures are for real business operation, and are not being manipulated for avoiding tax.
The new rule, which takes effect on May 1, sends a clear signal that the top tax authority will not just focus on overall profitability of multinationals – foreign or Chinese – but also factor in other conditions such as whether the company receives a fair share of global profit commensurate with its value contribution.
The tax man will also monitor a company’s interest expenditure associated with debt investment from related parties and profits distributed from an overseas subsidiary controlled by a Chinese company, according to the rule.
As a balancing act, the rule also includes streamlined procedures to mitigate double taxation in line with China’s tax treaties with trading partners.