China plans to get tough on corporate tax evasion
China is joining an international effort to tackle tax evasion, with plans to require multinationals to disclose more detailed information on their overseas affiliates, according to taxation consultants who advised the government on the new rules.
The proposed regulations would make it more difficult for large companies to avoid taxes by shifting profits among different countries and would be largely in line with the latest international corporate-tax rules that leaders of the Group of 20 major economies endorsed late last year, according to the advisers.
The measures could be announced as early as this month, said two advisers who declined to be named.
For companies that have made deals in so-called tax havens, the new rules would significantly raise the odds of penalties, said Travis Qiu, a partner of Ernst & Young (China) Advisory Ltd. in Shanghai.
The proposed regulations would be applicable to transactions made after Jan. 1 this year and be reflected in companies’ tax filings next year, he said.
Unlike China’s existing regulations on information disclosure, unveiled in late 2008, the new measures cover multinational companies’ overseas affiliates that don’t have direct transactions with China, said Mr. Qiu, who was one of the advisers to Chinese authorities.
“The new requirements are much more extensive and detailed than before,” he said. “It is designed to help enhance transparency and fair competition.”
Mr. Qiu said he would advise companies using tax havens “to adopt immediate remedy measures as there is a possibility that not one but several [countries’] taxation authorities may go after them.”
The use of offshore entities as part of corporations’ tax strategy has come under increasing scrutiny following the release of documents leaked from Panamanian law firm Mossack Fonseca.
Each year, between 4% and 10% of global corporate income tax, or some $100 billion to $240 billion, is lost due to shifting of profits by using offshore entities, according to the Organization for Economic Cooperation and Development.
China’s State Administration of Taxation didn’t respond to questions about the proposed new measures.
The new rules would weigh more heavily on larger companies rather than on smaller ones, Mr. Qiu said, and would initially affect only Chinese companies.
Some companies–likely those with headquarters in China and annual sales of more than 5 billion yuan ($767 million) — would be required to file a country-by-country report that gives tax authorities a fuller view of the multinationals’ financial information, such as global allocations of profits, Mr. Qiu said.
China would require a similar level of transparency from foreign companies once an international treaty that allows governments to exchange information through such reports goes into effect.
China and India were among six countries that signed the Multilateral Competent Authority Agreement last week at a taxation conference in Beijing, bringing the total number of signatories to 39, according to the OECD.
At the same event, China’s Vice Premier Zhang Gaoli vowed to get tougher on international tax evasion and compliance of rules by cross-border taxpayers, according to a statement posted on the taxation bureau’s website.
The crackdown comes as a slowing domestic economy is eating into Beijing’s tax revenues. Last year, tax revenues grew 4.8%, compared with 7.8% in 2014.
Beijing has taken measures to step up oversight of tax planning by multinational companies. In March last year, it asked companies to provide additional material when they pay fees to their overseas affiliates to prove the transactions are real. That measure alone helped the government collect an additional 3 billion yuan in taxes last year, according to a research report by Beijing Anbound Information Co., a private think tank.
As the Chinese economy undergoes a transition, the government is facing a balancing act as it needs protect its tax revenue but avoid taxing multinationals so heavily that it harms overall economic growth, said Mr. Qiu.
