China Vows to Toughen Stance on Tax Avoidance by Foreign Companies

Chinese tax authorities have pledged to step up efforts to crack down on tax avoidance by foreign companies, after the nation levied almost $140 million in back taxes from Microsoft.

China intends to establish systems to monitor the profit levels of companies to effectively prevent base erosion and profit shifting (BEPS) to other lower-taxed jurisdictions, according to Zhang Zhiyong, deputy director of the State Administration of Taxation (SAT), in a statement posted on the administration’s website.

Background

Chinese president Xi Jinping recently called for combating international tax evasion by strengthening global tax cooperation. In a recent interview posted on the SAT website, Zhang responded to questions regarding the president’s plans. Zhang stated that President Xi’s instructions included three aspects:

• Strengthen global tax cooperation,

• Combat international tax evasion, and

• Help developing countries and low-income countries improve tax collection capabilities.

Xi and other G20 leaders have agreed to ensure that the international tax system is fair. Zhang referred to the general principles of the BEPS project, where essentially “the tax should match the real economic activity.”

Need for reform

According to Zhang, the current international tax system no longer meets the needs of the global economy, and thus the international community must work together to reform the existing system.

On the topic of combating international tax evasion and safeguarding China’s interests, Zhang indicated that the first step would be to learn the latest BEPS findings and improve the relevant tax laws and regulations.

In addition, Zhang spoke of establishing a monitoring system to grasp Chinese multinationals’ profit levels and target response to international tax risk.

Trouble ahead

The heightened tax scrutiny may spell more trouble for multinationals, as they struggle with China’s vigorous enforcement of antimonopoly regulations.

Chinese authorities in September levied a $46 million fine against the local arms of Audi AG and Chrysler. Microsoft and chip maker Qualcomm Inc. are still being investigated for suspected violations of the country’s antitrust rules. 

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