[Multinationals’Walkthrough,of,Tax,Evasion] of

　　 　　 Recently, the taxation of 403 million yuan from the largest non-resident-enterprise indirect stock transfer in China was successfully paid to the Shanxi taxation department. The trade happened between a BVI offshore company and a Shanxi-based energy company.
　　The amount of regained tax hit the historical high, outnumbering the taxation amount of 306 million yuan from the indirect stock transfer between a Japanese enterprise and China’s beverage giant Master Kang.
　　The taxation department in Jincheng, Shanxi, spent one year in collecting this duty. After several negotiations, the tax collector and payer reached a compromise – the latter finally agreed to pay the tax according to the taxation law of China.
　　“If we have not anti-tax evasion methods, this 400-million-yuan taxation amount cannot be collected,” said Wang Jun, founder of the Zhonghan International Transfer Pricing Alliance. The antitax evasion methods refer to the active measures taken by the government to prevent and stop the tax evasion activities. These measures are usually applied against the multinationals and foreign-invested companies, which make use of the systematical loopholes to avoid tax payment through affiliated companies and overseas trades.
　　In March 2012, the General Administration of Taxation held a national conference, in which the deputy director of this department said that the anti-tax evasion measures contributed to the additional taxation of 23.9 billion yuan in 2011.
　　Prof. He Yang from the Taxation School at the Central University of Finance and Economics told us that the multinationals are tending to make use of differences among the taxation systems of different countries as the global trade and investment are goring, which somewhat undermines the taxation base of these countries. In addition, developing countries are more likely to become a victim of this activity due to their imperfect taxation administration and related legal systems. Some non-profit organizations found after surveys that the profits transferred out of developing countries amounted to 35 billion U.S. dollars every year.
　　In 2011, it was reported that Google’s affiliated companies and subsidiaries in China – Guguo IT(Shanghai) Co., Ltd, Shanghai Gouxun Advertising Company, and Google China – were suspected of avoiding paying tax of 40 million yuan. The three companies made use of illegal invoices, adding irrelevant cost (such as massage fees) into the operating cost and deducing operating tax out of the stipulations.
　　Google China responded that they “never thought that their activities violated any Chinese laws”.
　　In spite of Google’s confidence, making use of loopholes in policies is a global “routine” for the multinationals.
　　According to the survey of Bloomberg, Google’s fast growing assets are mainly attributed to its advertising business, but the profits gained in non-American market are usually transferred to some duty-free places through a complicated legal system, which keeps its tax rate at the extremely low level of 2.4%.
　　The General Administration of Taxation’s data in 2004 showed that multinationals’ tax evasion could cause about 30-billion-yuan loss for China every year.
　　The data in 2008 showed that the United States re-collected the tax of 100 billion U.S. dollars with anti-tax evasion measures while China only recruited 700 million U.S. dollars.
　　 How Foreign Companies Avoid Tax
　　For the taxation system in China, on one hand, Chinese companies are calling for reducing their tax burden; on the other hand, multinationals are causing great taxation loss with tax evasion. Though China intensified its anti-tax evasion in recent years, many companies still avoid paying tax as much as possible through various methods. Liu Hao, a tax collector in Gansu said that 60% of foreign-invested companies in China were haunted by loss and most of them remained alive.
　　According to Liu Hao, the anti-tax evasion measures can bring additional tax to the national treasury. The amount is extremely exciting in the places where a lot of foreign-invested companies could be found. For example, in Jiangsu, the anti-tax evasion negotiations can lead to the recollection of hundreds of billion yuan annually.
　　During the “11th Five-Year Plan” (2006-2010), the Suzhou government recollected the tax of 14.6 billion yuan. As a city in Jiangsu province, Suzhou contributed to 13.5% of the additional tax brought by anti-tax evasion measures. From 2011 to now, the Suzhou government already collected the tax of 3.5 billion yuan and seven cases involved more than 100 million yuan of evaded tax.
　　Then how did these foreign-invested cheat the tax collectors?
　　“Transfer pricing is the most common method to avoid paying tax,” Liu Hao said. The transfer pricing refers to making use of affiliated companies to transfer profits to foreign countries.
　　“Simply speaking, these companies buy raw materials at 20 yuan but sell products at 10 yuan. No profits are gained in the production process, putting enterprises into the status of loss. Affiliated companies attributed the profits to their parent companies in foreign countries and thus avoid paying tax in China.”
　　Foreign companies in China usually avoid paying the business incomes, which is a kind of circulation tax and only applies to companies’ profits.
　　A research by the Central University of Finance and Economics said that some multinationals, especially those having relations with duty-free areas, were indeed involved in transfer pricing in China. They make us of profit transfer to obviously reduce their taxation burden.
　　The research revealed that multinationals involving transfer pricing in China have a higher before-tax profit margin than Chinese local companies, meaning that they have higher production efficiency and profit level.
　　Notable is that the tax burden per asset for multinationals is 0.1% lower than local companies, while the multinationals having relations with dutyfree areas enjoy a tax rate per asset which is 0.34% lower than local companies. They also enjoy a 4.4% lower tax rate than local companies in the tax burden per profit. This means that multinationals are enjoying lighter tax burden compared with local companies in China.
　　This research concluded that the high profit margin and low tax burden are features of multinationals’ transfer pricing.
　　 Battle against Multinationals
　　Because there are no rules and stipulations against tax evasion activities, the taxation departments in China are facing great challenges. The anti- tax evasion is thus featured with Chinese tax collectors’ battling against foreign companies with their wisdom and courage.
　　According to Wang Jun, the anti-tax evasion is usually conducted through negotiations, during which the taxation department and involved enterprises follow some confidential agreements – the taxation department will keep the privacy of these enterprises and did not pulish their names.
　　But the process of the anti-tax evasion negotiation is usually as exciting as a Hollywood movie.
　　
　　Liu Hao said that once he and his colleagues investigated a processing company, which only had 5% profit margin though the average profit margin of this industry reaches 20%. After finding and tracking the financial data of this company’s affiliated companies, they found that the enterprise bought raw materials at a price much higher than market routine while their products are cheaper than the normal market level. These affiliated companies all belonged to one multinational. With the truth in hand, the taxation department held a three-month negotiation with this multinational, forcing it to repay the additional tax amounting to millions of yuan.
　　Wang Jun also joined in an anti-tax evasion negotiation. A multinational engaged in agriculture was under investigation by the Jiangsu provincial department, which found that the multinational’s profit level is lower than normal level for a long while.
　　Then the negotiation started. Wang Jun recalled that it was a seesaw battle. He and others went to the company six times and they analyzed the data of alliliated companies and industries, which was also a great workload.
　　“The monopoly multinationals are tougher to deal with than ordinary multinationals,” Wang Jun said.
　　It is because ordinary multinationals have the standard of industry it is engaged in as a contrast. For example, the duplicating machine industry sees the engagement of many companies and has an average profit level as the parameter. But monopoly multinationals take the dominant place in the industry, whose average profit level is this company’s profit level, leaving no parameter available.
　　“Thin capitalization is another powerful weapon for multinationals to avoid tax payment.”
　　The thin capitalization refers to the activity of dragging the proportion equity investment to a level lower than debt investment while raising funds.
　　“Simply speaking, when the companies are raising funds, the capital that should be put into equity is placed into debt, which is of course duty free,”said Wang Jun.
　　A Japanese company’s subsidiary in Shaanxi is involved in the “biggest case of thin capitalization”in China. Local taxation department found after investigating this subsidiary’s balance sheet that the asset-liability ratio of this company from 2007 to 2009 were respectively 91.26%, 87.32% and 93.86%, much higher than the ordinary level of companies.
　　What’s more important is that most of its debts came from the borrowings of its affiliated parties, which could generate a large amount of premium cost, mortgage cost and interest that were transferred to parent companies. The total amount in three years reached 22 million yuan.
　　The taxation department found more doubts from this company as the investigation became deeper. The feasibility report of this company showed that the period of gaining returns on investment was 3.84 years. But its financial data showed that the company never saw profits from 2003. In spite of that, the parent company continued to make additional investment into that company. The total amount reached about 54.7 million U.S. dollars.
　　Even a bank is willing to provide this company with loans regardless its years’ loss. The total amount of loans was about 55 million U.S. dollars and the parent company shoulders the duty concerned.
　　 Unoptimistic Supervision
　　Compared with developed countries, China was late in taking anti-tax evasion measures.
　　In Liu Hao’s opinion, the Implementation Measures of Adjusting Special Tax Payment issued by General Administration of Taxation in 2008 is an important stipulation in China. However, compared with multinationals’ anti-tax evasion systems consisting of dozens of links, the Chinese taxation department’s counter-system, which only has six or seven links, seems to be too weak.
　　Liu also believed that the shortage in tax collection talents is also a hurdle for China’s anti-tax evasion project.
　　A source said that a department director was the initiator and promoter of the Implementation Measures of Adjusting Special Tax Payment. He is also one of the top experts in the anti-tax evasion terrain and most of tax collectors in China listened to his instructions about tax collection.
　　But now, he moved to an international accountancy firm as the partner of transfer pricing and tax risk, throwing himself into the field of providing consultancy about tax evasion which he fought against for years.
　　“Our taxation system trained a lot of tax talents, but many of them moved to the famous accountancy firms,” said this former government official. Their annual salary could increase hundredfold after the moving.
　　“It is harder to ask young, inexperienced apprentices to defeat their masters,” said this official. Only when the Chinese taxation department created a better environment to retain these “masters” could the anti-tax evasion project be enhanced in China.

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