Tax Bureau Scrutiny Issues
The Chinese Tax Bureau has different levels of scrutiny for different types of businesses. Some they monitor more than others. With China investment running apace – the State Administration of Tax can’t keep up. So they prioritize and do the best they can. Who is under category one scrutiny ? You guessed it, those foreign investors.
If you are a foreign national or operating a foreign invested enterprise in China, you are under the highest level of scrutiny by the tax bureau. Especially if you are running a significant investment from which tax revenues are anticipated to be generated.
Next in line come listed companies. Third come Chinese domestic enterprises, and lastly, State Owned Enterprises. Well, they’re run by the State and are run properly of course, because they’re government owned. So that’s all right then.
Render Unto Caesar Or Get Fined
If you try and evade tax in China, or operate a business that is out of compliance (which usually means manipulation of tax revenues) then you will get caught and you will get into trouble. It is not a matter of if; it is a matter of when. Would you like to explain to your board why taxes were paid late and not only that, the China tax bureau want 5 times that amount due in late payment penalties as well ?
Foreign Company Tax Treatment vs. Chinese Company Tax Treatment
There are inequalities here too, and your manager may be used to the Chinese benefits of these, again causing cultural difficulties. As we have seen, foreign investors in China are at the highest level of scrutiny and are expected to pay everything that is due according to the law. There are legitimate ways to reduce tax exposure, imaginative transfer pricing, use of chargeable expenses from your parent and so on. But the tax bureau want you, and they want their money. After all, unlike Chinese domestic companies, you lucky foreigners have been able to obtain tax incentives – 15% profits tax ceiling if located in a free trade zone (off limits to local companies) and tax holidays of usually five years (off limits to local companies). So it’s hardly surprising they want to get something out of you.
However, it’s not necessarily like that for Chinese companies. While they may not be able to access the low tax thresholds or holidays, they can obtain benefits in other ways.
Firstly, they may be able to negotiate a deal with the local tax bureau for payment of a fixed amount of tax every month or year. That saves the tax bureau the problem of having to deal with all those pesky audits and have to review them all. Which is great when you’re stretched, you just can’t get the staff these days…so often, deals are done for a fixed tax return. Obviously these are not entirely at the real level of tax that would actually be due if the business was properly audited and declared everything. We estimate instead of the 33% collection that should be due on profits from Chinese companies, many actually contribute @ 5%.
Which is a point to note if the SAT wish to widen their tax collection base.
