Article- Marketwatch: China to step up tax supervision of multinationals

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. , 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.