China has a plan to close a multibillion-dollar corporate tax loophole

Feng Li/Getty Images

China is mulling plans to tighten tax reporting requirements on multinationals operating in the country to help close a ­massive global loophole.

If the plan goes ahead, multinationals would have to file extensive reports on internal pricing and costs between overseas branches and headquarters, sources said.

The plan is China’s contribution to a global effort to stamp out the common practice of multi­nationals altering the price put on labor, services or intangible asset transfers within global ­operations to allow firms to divert profits to low-tax countries.

The Organization for Economic Cooperation and Development estimated that these kinds of profit-shifting practices amounted to about US$100 ­billion-US$240 billion in lost tax revenue each year, equivalent to up to 10 per cent of global corporate income tax revenue.

A source at a law firm told the South China Morning Post that the State Administration of Taxation issued a consultation draft on the proposal at the end of last year, specifying that multi­nationals would have to disclose affiliated businesses and how intangible assets, labor and other ­internal cost transfers were made. “[Internal transfer pricing] is a gray area to utilize loopholes in tax rules between different countries, but now the governments [of those countries] are acting to close the hole,” the source said.

The OECD has been pushing for countries to set universal ­reporting standards to close the loophole since 2012.

The source said the draft by China’s tax authorities was an attempt to bring domestic rules into line with OECD standards.

Tax partners from Ernst & Young and PricewaterhouseCoopers said the new rules were expected to take effect retrospectively from January 1, 2016.

Feng Li/Getty Images

The source at the law firm said the draft had provoked much debate because of the magnitude and detail of the documents multinational companies – both Chinese and foreign – would have to submit to tax authorities.

“We suggested it be more specific on implementation and more feasible otherwise it would lower the incentive for multi­nationals to invest in China,” the source said.

But Jeff Yuan, a PwC China and Hong Kong transfer pricing services leader, said multinationals faced similar changes elsewhere. “The extra documentation work is not only happening on the mainland but in major economies as well. It is the first time that major economies have taken joint ­action to address the tax avoidance issue amid growing globali­zation,” he said.

Mainland companies heading offshore could find the requirements onerous because they lack experience in the area, according to EY tax partner Travis Qiu.

According to tax partners at PwC and EY with knowledge of the consultation, the proposal would require multinationals to submit three sets of tax filings: one revealing transactions with affiliated companies, a second on how these transfers occurred within the group’s global operations, and a third detailing shared financial or manufacturing costs.

PwC tax partner Paul Tang said Beijing had stepped up its ­efforts to counter tax avoidance in recent years.

“The focus has been shifting from tangible assets to intangible assets,” Tang said, adding that parts of the proposal went beyond the OECD’s requirement by targeting overseas payments like service fees and royalties.

Vice-premier Zhang Gaoli said at a taxation forum in Beijing on Wednesday that China had called for greater international cooperation to clamp down on tax avoidance and evasion.

NOW WATCH: Consumer Reports put Costco and Sam's Club head-to-head — here's the verdict