The Chinese government’s vow to increase tax scrutiny on foreign companies sent firms rushing to tax advisers ahead of Sunday’s implementation of new rules designed to rein in cross-border tax avoidance.
Tax professionals and business lobbies have welcomed the move as an attempt to bring China’s tax regime more in line with international standards.
However, it has also caused concern that authorities could use the policy, which came into effect on Sunday, as a political tool to put the pinch on foreign companies, on top of what business lobbies lament is an increasingly tough business climate in the world’s second-largest economy.
“We have definitely been getting a lot of questions from clients on how to avoid being investigated for anti-avoidance measures,” Hogan Lovells Shanghai-based tax lawyer Roberta Chang said.
The measures, an elaboration of China’s existing “general anti-avoidance rule,” or GAAR framework, have more companies taking a hard look at how they structure their businesses.
Under the new policy, for example, a firm that invests in China through companies in Hong Kong or Singapore to take advantage of tax benefits that do not exist between China and its home nation could find itself on the wrong side of Beijing tax authorities if it cannot prove that it has substantial business operations in the third-party nation or employees on the ground.
“Companies are increasingly putting substance in their holding companies,” Chang said.
Ernst & Young Greater China International Tax Services leader Andrew Choy said the GAAR rules are a signal that companies need to pay attention to tax planning.
“In general, people will be more conservative,” Choy said.
Chinese regulators hit Microsoft Corp with about US$140 million in back taxes in November last year, an early case of what could be a wave of “targeted actions” to stop profits from going overseas, according to officials at the Chinese State Administration of Taxation.
With a slowing economy likely to reduce this year’s fiscal revenue growth to a three-decade low of just 1 percent, according to a Deutsche Bank report, it makes sense for Beijing to try to boost its coffers.
Tax specialists said companies need to be aware that China’s tax regime is evolving, albeit as part of a global trend to curb tax avoidance.
At a meeting of G20 leaders in Australia in November last year, Chinese President Xi Jinping (習近平) endorsed a global effort to crack down on international tax avoidance.
“Compared to the US or the UK, China’s tax rules are still simpler, but China does not want to be seen as an undeveloped country with tax rules. It wants to catch up to other international players,” Chang said.
At the forefront of evolving international tax policy is the debate about whether the right to tax should be tilted toward industrialized, capital-exporting nations where firms reside, or so-called source nations such as China, where many generate significant profit.
“There is a large element from a government policy perspective that has to do with whether China is going to tax particular profits or some other country,” Baker & McKenzie Beijing-based tax expert and partner Jon Eichelberger said.
Chinese state media outlets have said that tax evasion and avoidance by foreign companies cost China at least 30 billion yuan (US$4.8 billion) in tax revenue each year.
O’Melveny & Myers Beijing office managing partner Larry Sussman said that the scope of the scrutiny could also reach private equity firms and mergers and acquisition activity.
“Anything cross-border coming in and coming out, for that matter, which could implicate Chinese investors,” Sussman said.
Despite the elaboration to the GAAR rules, they remain loosely defined, giving tax authorities discretion on whether companies meet the demands for economic substance.
Elon Musk’s lieutenants have reached out to chip industry suppliers, including Applied Materials Inc, Tokyo Electron Ltd and Lam Research Corp, for his envisioned Terafab, early steps in an audacious and likely arduous attempt to break into the production of cutting-edge chips. Staff working for the joint venture between Tesla Inc and Space Exploration Technologies Corp (SpaceX) have sought price quotes and delivery times for an array of chipmaking gear, people familiar with the matter said. In past weeks, they’ve contacted makers of photomasks, substrates, etchers, depositors, cleaning devices, testers and other tools, according to the people, who asked not to
The EU and US are nearing an agreement to coordinate on producing and securing critical minerals, part of a push to break reliance on Chinese supplies. The potential deal would create incentives, such as minimum prices, that could advantage non-Chinese suppliers, according to a draft of an “action plan” seen by Bloomberg. The EU and US would also cooperate on standards, investments and joint projects, as well as coordinate on any supply disruptions by countries like China. The two sides are additionally seeking other “like-minded partners” to join a multicountry accord to help create these new critical mineral supply chains, which feed into
Japan approved ￥631.5 billion (US$3.97 billion) in additional subsidies to hasten Rapidus Corp’s entry into the high-stakes artificial intelligence (AI) chipmaking arena, ramping up support for a project widely regarded as a long shot. The capital is intended to bankroll Rapidus’ work for information technology firm Fujitsu Ltd, one of the initial customers that Tokyo hopes would get the signature endeavor off the ground. The new money raises the fees and investments that the government is injecting into the start-up to ￥2.6 trillion by the end of the current fiscal year to March next year, the Japanese Ministry of Economy, Trade and
The founder of Chinese property giant Evergrande Group (恆大集團) has pleaded guilty to charges of fraud and bribery, a court said yesterday, the latest blow for what was once the country’s leading developer. Evergrande’s rise was propelled by decades of rapid urbanization and rising living standards, but in 2020, its access to credit dramatically narrowed when the government introduced curbs on excessive borrowing and speculation. The company defaulted in 2021 after struggling to repay creditors. Founder Xu Jiayin (許家印), 67, known as Hui Ka Yan in Cantonese, was reportedly held by police in 2023, with Evergrande saying he had been subjected to
RSS