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19 Oct, 2015

China plans fool-proof tax regime to foil multinational corporations by year-end


Beijing, (China Daily) 2015-10-13 – A key government draft proposal that will seek to tackle multinational corporations’ tax-avoidance will draw from a latest international tax rule, and is expected to be rolled out by the year-end, a top tax official said.

Wang Xiaoyue, vice-director of the International Taxation Department under the State Administration of Taxation, told China Daily the period of soliciting opinions on the draft proposal will soon end.

The proposal, which is known within the industry as the No 2 Document, is being closely watched by MNCs in China and tax professionals alike. For, it will give detailed guidance on what MNCs call “transfer pricing”.

The document will define what is “reasonable” transfer pricing and what is not, a term used in transactions among divisions of a company. Authorities believe such intra-company deals have become a front for corporate tax avoidance.

The document has drawn from action plans on base erosion and profit shifting or BEPS, the emerging international tax rule, especially in transfer pricing of intangible assets, interest deductions and overseas subsidiaries.

The BEPS Action Plan has offered recommendations on how each nation’s tax authority could tackle these issues.

Globally, the BEPS Action Plan represents an ambitious effort to modernize and align corporate tax with value creation and economic activity.

MNCs have long exploited loopholes in existing rules to avoid corporate taxes. For example, MNCs have been shifting their profits from locations of their operations to low-tax havens to avoid paying taxes.

The resulting revenue losses to national exchequers have grown from $100 billion to $240 billion a year, according to an estimate of the Organization for Economic Co-operation and Development. The OECD considers its own estimate very conservative.

The BEPS Action Plan was released by the OECD on Oct 5 and won strong endorsement from finance ministers of G20 nations. It is expected to be a major achievement at next month’s G20 Summit.

China is among 61 nations that have engaged in the drafting of the BEPS Action Plan. It has submitted more than 1,000 suggestions to international panels.

For its part, China’s SAT has issued four documents on anti-tax avoidance since 2014, which integrated latest international principles. Some 52.3 billion yuan ($8.2 billion) of tax revenue was saved last year. This year, the figure is expected to hit 60 billion yuan, the SAT said.

“SAT is actively transferring BEPS spirit to domestic legislation. However, we’ll not copy all of the recommendations. We’ll revise some and leave some out,” Wang said.

She said the focus of China’s existing anti-tax avoidance regime is on avoidance of double-taxation. But the BEPS plan focuses on the increasing incidence of double non-taxation as new businesses are increasingly digital, services-based and driven by intangible assets, and it is easier for MNCs to shuffle profits from subsidiaries in high-tax countries to those in low-tax ones.

MNCs also tend to treat what is regarded as debt in one country as equity in another country, to claim two lots of tax deductions.

The document, if implemented, would rein in such practices.