BEIJING--Chinese tax authorities are vowing to step up
supervision of multinational companies as part of a crackdown on
tax avoidance in the latest challenge for foreign firms operating
in the highly regulated China market.
Zhang Zhiyong, deputy director of the State Administration of
Taxation, said the agency will conduct comprehensive audits of the
profits of foreign companies. In a notice in a question-and-answer
format posted on the agency's website Monday, Mr. Zhang singled out
for scrutiny "base erosion and profit shifting" tactics, which are
among a number of methods used to shift profits across borders to
countries with lower tax rates.
The notice is the latest sign of heightened official attention
to foreign companies, following a spate of antitrust investigations
involving multinationals. It comes as China's economy is slowing
for the first time in nearly a generation, putting pressure on tax
revenue at a time when the Chinese public is demanding better
education, health care and other social services.
Tax revenue in the first 10 months of the year rose 7.6%, down
from a 9.8% growth rate same period last year and falling from
double-digit growth in previous years. Economic growth, meanwhile,
eased to 7.3% in the third quarter, and many economists and
analysts expect the government will miss the official 7.5% target
this year for the first time in more than a decade.
China signaled a tougher line on taxes last month when the
government's news agency, Xinhua, reported that a U.S.
multinational will pay the Chinese government 840 million yuan
($135.5 million) in back taxes and interest after authorities found
the firm had avoided taxes. The U.S. firm also agreed to pay more
than 100 million yuan in additional taxes every year, Xinhua
said.
Xinhua didn't identify the company by name but referred to it as
"Company M" and described it as being globally well known, among
the world's top 500 companies and having set up a wholly
foreign-owned enterprise in Beijing in 1995.
The description matches, at least in part, the U.S. software
giant Microsoft Corp. Microsoft, in response to a request for
comment, said it would neither confirm nor deny that it was the
company referred to in the Xinhua report. The company said in a
statement Tuesday that "Microsoft's profits are subject to the
appropriate tax in China."
Multinational companies' tax practices are coming under scrutiny
around the world by governments eager to shore up their tax
revenue. At a meeting last month in Australia, leaders of the Group
of 20 major economies, including Chinese President Xi Jinping,
endorsed a platform for cracking down on corruption and tax
avoidance.
In the notice this week, Mr. Zhang, the Chinese tax official,
said President Xi at the summit cited the need to "strike at
international tax evasion."
Regulators world-wide have targeted common practices like
charging local subsidiaries fees for the use of a company's brand,
intended to shift profits to jurisdictions with a lighter tax
burden.
The U.K. and EU have examined companies like Apple Inc.,
Starbucks Corp. , Amazon.com Inc. and Google Inc. for shifting
profits to low-tax areas. Starbucks agreed last year to pay U.K.
corporation tax for the first time since 2008.
While these tactics are legal, they generate bad publicity for
companies and contribute to the political fallout.
China's tax crackdown, if it gains steam, could add to the
complaints of foreign companies, which have criticized regulators
in the country for a lack of transparency. Earlier this year, auto
makers Audi AG, BMW AG and Daimler AG, along with Microsoft and
U.S. chip maker Qualcomm, were all investigated for suspected
violations of the country's antimonopoly law.
Audi, which was fined, said it would improve its management
processes to prevent a repeat of the episode. BMW also was fined
and said it was committed to "responsible and lawful conduct."
Daimler, owner of the Mercedes marque, has said it is cooperating
with the continuing investigation. Microsoft said it was compliant
with Chinese law. Qualcomm said it wasn't aware of any activity
that violated the antimonopoly law.
The U.S. Chamber of Commerce in China said enforcement of the
rules "arguably violates commitments that China undertook when it
acceded to the World Trade Organization."
China says the investigations aren't aimed at foreign companies
and are being carried out fairly and according to law.
Richard Silk and Grace Zhu
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