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Potential new Chinese tax rules would require significant reporting for multinational companies
China is considering measures to increase corporate tax reporting requirements in the area of international transfer tax, following pressure from the Organisation for Economic Co-operation and Development (OECD) for the past four years for countries to create and implement universal reporting standards to close off loopholes in the corporate tax reporting system. The proposed plans for China are coming to attention following Wednesday’s tax forum in Beijing, where the Chinese Vice-Premier voiced China’s commitment to more international cooperation against corporate tax avoidance.
The plans under consideration would mean considerable filing and reporting responsibilities for multinational companies, requiring detailed reports on costs incurred between international offices and corporate headquarters. The requirements would bring China’s reporting rules closer to the OECD’s reporting standards, creating more of a level playing field.
A legal source tipped off the South China Morning Post about a draft consultation paper addressing the proposal that was released in late 2015. The paper stated that under these measures, multinational corporations needed to report on all businesses affiliated with the company, providing details on inter-departmental and internal transfers, intangible assets and labour costs. This would make up a significant reporting responsibility and administrative burden for both Chinese and overseas multinationals, so the draft proposals viewed have been cause for considerable concern and debate.
Internal transfer pricing has been a loophole through which companies could bypass tax reporting requirements from different jurisdictions, which the OECD approximates could account for as much as $240 billion US dollars in lost taxes.
Partners from global accountancy firms, PwC and EY, commented on the proposals to the South China Morning Post and believe that the rules would be implemented retrospectively from the beginning of 2016. A partner at PwC China and Hong Kong suggested that the requirements are akin to those required in other countries, so represents an alignment of major economies in taking action against tax avoidance. However, the paper’s legal source said that there needed to be more work on feasibility and around the specifics of implementation of the proposals, as the proposed measures could have the unintended consequences of lowering interest in and appetite for investment in China.
