China To Launch Tax Crackdown On Foreign Firms

by Mary Swire, Tax-News.com, Hong Kong

06 July 2004

According to reports, the Chinese tax authorities are to launch a probe into the tax affairs of foreign-backed firms in the belief that many are deliberately understating earnings in order to reduce or avoid paying tax.

The investigations are to focus particularly on foreign firms that are undergoing expansion within China, but who have also reported consecutive losses, China Business reported, citing the State Administration of Taxation.

It has been suggested that many multinationals are inflating import costs through related-party transactions in order to bring about a reduction in tax liability, whilst other firms are said to be using legal loopholes to reduce tax.

The report also accused many firms of closing down and reopening after a period of five years in order to reclaim introductory tax breaks. Under these incentives, income tax is waived for two years, followed by a three year period where income tax is halved, in an effort to encourage investment by foreign firms.

The Chinese authorities have supposedly approved the establishment of 400,000 foreign-backed companies, some 60% of which have reported losses, leading to a loss of tax revenue in the region of 30 billion yuan ($3.6 billion).

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