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2 How foreign firms dodge taxes in
China By Olivia Chung
400,000 registered companies) and
the British-controlled Cayman Islands.
And
the total utilized FDI from the 10 places reached
$24 billion, far more than the amount invested by
players in developed countries such as the US,
Japan and South Korea.
However, China's
main concern is not fake foreign companies' taking
advantage of tax breaks, but their funds being recycled
through the tax havens to
transfer profits abroad.
Some foreign
companies with affiliates operating offshore use
"round-tripping", that is, funds leaving China
only to return in the form of FDI, to dodge taxes.
For example, they claim their investment comes
from high-interest loans from their affiliates
operating offshore and pay them interest on the
loans, which could eventually lead to tax evasion
and, even worse, money-laundering.
After
enjoying the five years of tax benefits offered by
the SEZs, some foreign manufacturers, either fake
or real, use transfer pricing by importing raw
materials at high prices and exporting finished
products at low prices to shift revenues abroad
and avoid paying tax in China.
According
to officials at the anti-tax-evasion division of
the State Administration of Taxation, transfer
pricing is the most common way of evading taxes,
accounting for 60% of all types of tax evasion.
Foreign companies inflate the cost of production
equipment, raw materials and labor, and export
products at falsified low prices, transferring
most of the profits - and tax liabilities - to
their sister companies in other countries to
capitalize on lower tax rates there.
Such
business activities by foreign companies not only
enable their enterprises in China to appear
unprofitable, but also trigger an increasing
number of anti-dumping charges, launched by the US
and Europe, against Chinese products.
The
accounting expert said transfer pricing has become
a common practice for multinational companies
under economic globalization.
"As
multinational companies have businesses in
different countries or regions, they can optimize
transfer pricing and minimize overall tax payment
after seeking advice from accounting firms," the
expert said.
According to statistics
quoted by the mainland media, from 1990 to 2004,
revenues shifted by foreign-invested enterprises
in China reached $250.6 billion.
"No
wonder foreign-funded companies contributed to
one-third of China's industrial output, but only
generated one-fifth of the total tax revenues," a
commentator was quoted as saying by the media,
criticizing some foreign companies for tax
avoidance.
Ironically, although the
possible illegal business activities of foreign
enterprises has been hotly debated in recent
years, not a single foreign-invested company was
involved in the top 10 tax-evasion cases
investigated by China's public-security
authorities in 2005.
The accounting expert
blamed loopholes in China's existing laws - for
example, the failure to distinguish between tax
evasion and tax avoidance - for preventing tax
officials from snooping into overseas bank
accounts and shell companies.
They also
attributed tax evasion to China's lax enforcement
system for tax collection, which is partly due to
a shortage of trained professionals and a backward
information system.
Some believe the new
Corporate Income Tax Law passed by the annual
session of the National People's Congress last
month, which comes into effect from next January
1, could create a level playing field for local
and foreign-funded manufacturers. But
Shanghai-based economic commentator Ma Hongman
said the new law has little negative impact on
foreign-invested companies.
"Whatever
changes have been made in the Corporate Income Tax
Law, many foreign-invested companies, particularly
those who have been claiming losses in China,
would not even pay a cent," Ma said.
"Besides, illegal tax evasion by
multinationals not only results in a massive loss
of tax from the central government's coffers, but
also creates unfair competition between domestic
companies and multinational companies, as the
latter can use profits transferred abroad to
enhance competitiveness to get a bigger share of
the market," he said.
Ma said China's
customs officials are able to identify the methods
used by foreign companies to avoid tax - such as
transfer pricing. He said the main reason for the
rampant tax avoidance is that some local
governments indulge multinationals.
"As
many local governments use the amount of foreign
investment and the sizes of foreign companies as
the main yardsticks for [measuring] the
performance of public servants, who will have the
courage to look into the problem of tax
avoidance?" he asked.
Olivia
Chung is a senior Asia Times Online
reporter.
(Copyright 2007 Asia Times
Online Ltd. All rights reserved. Please contact us
about sales, syndication and republishing.)
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