Page 1 of
2 How foreign firms dodge taxes in
China By Olivia Chung
HONG KONG - Since China opened its doors
in the late 1970s, foreign investment has kept
flowing in. Thousands of foreign-invested
companies are set up across the country each year.
But are foreign enterprises making profits or
losses in China?
According to official
statistics, as of the end of 2005, there were
about 500,000 companies with foreign investment
registered in China. Of those, about 330,000 had
started operating. About 55%
of
the foreign companies operating reported losses
between 2001 and 2004. In 2005, the figure dropped
to 42.96%.
It seems strange that while
Chinese enterprises, including state-owned,
joint-stock and private companies, have been
making profits in recent years, nearly half of all
foreign-invested businesses have been losing
money. Yet while so many foreign enterprises claim
to be losing money, China witnesses a continual
rise in its foreign direct investment (FDI).
FDI in China in 2006 totaled US$63
billion, higher than the $60 billion in the United
States. China became the largest FDI recipient in
the world in 2003, receiving $53.5 billion.
According to a research report by the
National Bureau of Statistics on foreign companies
claiming to be making losses in China, two-thirds
of them have "extraordinary losses". Chinese
officials believe many of these foreign companies
are in fact using transfer pricing and other ways
to reduce taxable income.
Chinese
officials earlier said tax evasion by
multinationals costs the country 30 billion yuan
(US$3.88 billion) in tax revenue each year.
There are two main types of
foreign-invested companies in China - Sino-foreign
joint ventures and foreign solely owned firms.
Some joint ventures make losses partly
because of their untrustworthy foreign partners.
For example, the foreign partner of an automobile
joint venture would import a huge amount of spare
auto parts from its parent company in its home
country instead of buying Chinese-made auto parts,
which are much cheaper than imported ones. In this
way, foreign companies not only transfer profits
to their parent companies, but also hurt their
Chinese partners by making their joint ventures
lose money.
According to accounting
experts, China's complicated policies on corporate
income tax and preferential tax in various cities
encourage tax avoidance. Some domestic enterprises
would try every possible way to become "foreign
companies" so as to enjoy tax breaks.
China launched a dual-corporate-tax system
to attract foreign investment more than a decade
ago, in which foreign-funded companies enjoy an
income-tax rate of 15% while domestic firms pay
33%. In China's special economic zones (SEZs) or
industrial parks, foreign manufacturers can also
enjoy preferential tax policies including two-year
full tax exemption and three-year partial tax
exemption.
Feeling that the dual corporate
income tax is unfair, many Chinese enterprises
register overseas and return to the country as
foreign enterprises to enjoy tax breaks, which are
known as "fake foreign enterprises", said an
accounting expert who asked not to be named.
"Once registered in offshore tax havens,
the Chinese companies can return to China in the
form of foreign direct investment, qualifying
themselves for favorable taxation rates and tax
incentives, paying income tax at rates as low as
10%," he said.
Among such Chinese
enterprises-turned-foreign businesses, Gome,
China's largest home-appliance retail chain,
became a foreign company after its successful Hong
Kong listing in June 2004. According to its
reports, since its transformation, Gome enjoyed
tax rates of 9%, 10.6% and 11.2% respectively in
the second half of 2004, the whole of 2005 and the
first half of 2006. By comparison, it paid
corporate income tax of about 20% in 2003.
In contrast, Suning Appliance, China's
second-biggest mainland electronic chain retailer
and Gome's major rival, needs to pay average
corporate income tax of 22%, given that its
subsidiaries in the Shenzhen and Xiamen SEZs enjoy
a tax rate of 15%, and its subsidiaries in other
places have to pay 33%.
As of the first
half of 2006, Gome had enjoyed a 200 million yuan
tax discount since its transformation from a
domestic company into a foreign company in June
2004.
Mei Xinyu, senior researcher at the
Chinese Academy of International Trade and
Economic Cooperation under the Ministry of
Commerce, said earlier that according to
estimates, of China's utilized FDI of $72.4
billion in 2005, one-third was Chinese investment
overseas that came back disguised as foreign
capital to take advantage of the tax breaks.
Among the top 10 countries or regions
investing in China in 2005 were Hong Kong, the
British Virgin Islands (a group of islands in the
Caribbean with a population of only 22,000 but at
least
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
