Tue, Feb 03, 2015 page15

• Foreign firms run to tax advisers on China’s new rules

  • Reuters, BEIJING
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  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.

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