China to scrutinise tax evaders

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China has announced a review of the movement of money and allocation of cost among Chinese operations and their overseas businesses.

The New York Times says the main target of Beijing’s latest tax-collection initiative appeared to be foreign-owned firms, but the review could also be applied to Chinese businesses that have set up holding companies in the Cayman Islands and elsewhere to avoid taxation,

“The focus right now is multinationals paying their fair share of taxes,” Howard Yu, a corporate tax partner at PwC in Beijing, told The Times.

The State Administration of Taxation disclosed the review on its website on Tuesday. China Daily, a state-run newspaper, warned that “multinationals, especially small, foreign companies should pay extremely high attention to their regulation compliance, as failure to do so would lead to huge losses.”

The tax administration said Tuesday it would investigate whether offshore companies in places with favorable tax treaties with mainland China were actually conducting business activities in those jurisdictions that allowed them to qualify for preferential tax treatment.

As Forbes has reported, China used to offer all sorts of preferential treatments to foreign companies as a way of encouraging investment.

The Times noted that one issue in Chinese tax policy is the country’s generous treatment of businesses in Hong Kong, which Britain returned to Chinese sovereignty in 1997. China has a 10% withholding tax on dividends paid from businesses in China to parent companies in most other countries, but the tax is only 5% for dividends sent to Hong Kong.

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