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.
‘SWASTICAR’: Tesla CEO Elon Musk’s close association with Donald Trump has prompted opponents to brand him a ‘Nazi’ and resulted in a dramatic drop in sales Demonstrators descended on Tesla Inc dealerships across the US, and in Europe and Canada on Saturday to protest company chief Elon Musk, who has amassed extraordinary power as a top adviser to US President Donald Trump. Waving signs with messages such as “Musk is stealing our money” and “Reclaim our country,” the protests largely took place peacefully following fiery episodes of vandalism on Tesla vehicles, dealerships and other facilities in recent weeks that US officials have denounced as terrorism. Hundreds rallied on Saturday outside the Tesla dealership in Manhattan. Some blasted Musk, the world’s richest man, while others demanded the shuttering of his
TIGHT-LIPPED: UMC said it had no merger plans at the moment, after Nikkei Asia reported that the firm and GlobalFoundries were considering restarting merger talks United Microelectronics Corp (UMC, 聯電), the world’s No. 4 contract chipmaker, yesterday launched a new US$5 billion 12-inch chip factory in Singapore as part of its latest effort to diversify its manufacturing footprint amid growing geopolitical risks. The new factory, adjacent to UMC’s existing Singapore fab in the Pasir Res Wafer Fab Park, is scheduled to enter volume production next year, utilizing mature 22-nanometer and 28-nanometer process technologies, UMC said in a statement. The company plans to invest US$5 billion during the first phase of the new fab, which would have an installed capacity of 30,000 12-inch wafers per month, it said. The
MULTIFACETED: A task force has analyzed possible scenarios and created responses to assist domestic industries in dealing with US tariffs, the economics minister said The Executive Yuan is tomorrow to announce countermeasures to US President Donald Trump’s planned reciprocal tariffs, although the details of the plan would not be made public until Monday next week, Minister of Economic Affairs J.W. Kuo (郭智輝) said yesterday. The Cabinet established an economic and trade task force in November last year to deal with US trade and tariff related issues, Kuo told reporters outside the legislature in Taipei. The task force has been analyzing and evaluating all kinds of scenarios to identify suitable responses and determine how best to assist domestic industries in managing the effects of Trump’s tariffs, he
Taiwan’s official purchasing managers’ index (PMI) last month rose 0.2 percentage points to 54.2, in a second consecutive month of expansion, thanks to front-loading demand intended to avoid potential US tariff hikes, the Chung-Hua Institution for Economic Research (CIER, 中華經濟研究院) said yesterday. While short-term demand appeared robust, uncertainties rose due to US President Donald Trump’s unpredictable trade policy, CIER president Lien Hsien-ming (連賢明) told a news conference in Taipei. Taiwan’s economy this year would be characterized by high-level fluctuations and the volatility would be wilder than most expect, Lien said Demand for electronics, particularly semiconductors, continues to benefit from US technology giants’ effort