New policy aims to curb tax dodges

The Chinese government's vow to increase scrutiny of foreign companies' taxes has sent businesses rushing to financial advisers to deal with the new rules, which are designed to rein in cross-border tax evasion.

Tax professionals and business lobbies alike have welcomed the move as an attempt to bring China's tax methods more into line with international standards.

But it has also raised concerns that the authorities could use the policy, which took effect on Sunday, as a tool to put the pinch on foreign companies - on top of what business lobbies already lament is an increasingly tough business climate in the world's second-largest economy.

"We've definitely been getting a lot of questions from clients on how to keep from being investigated under the anti-avoidance measures," said Roberta Chang, a Shanghai-based tax lawyer at Hogan Lovells.

The measures, an elaboration on China's existing General Anti-Avoidance Rules framework, have more companies taking a hard look at how they structure their businesses.

Under the new policy, for example, a company that invests in China through entities in Hong Kong or Singapore to take advantage of tax benefits that are not available from the company's home country could find itself on the wrong side of Beijing's tax authorities if it cannot prove it has substantial business operations or employees on the ground.

"Companies are increasingly putting substance in their holding companies," Chang said.

Andrew Choy, greater China international tax services leader at Ernst & Young, said the GAAR rules are a signal that companies need to pay attention to tax planning.

"In general, people will be more conservative," Choy said.

Chinese regulators socked Microsoft Corp with about $140 million in back taxes in November, an early case of what could become a wave of "targeted actions" to stop profits from going overseas, according to officials at China's State Administration of Taxation.

With a slowing economy likely to reduce this year's fiscal revenue growth to a three-decade low of 1 percent, according to a Deutsche Bank report, it makes sense for Beijing to try to boost its coffers.

Tax specialists say companies need to be aware that China's tax regimen is evolving as part of a global trend to curb tax avoidance.

At a meeting of G20 leaders in Australia in November, President Xi Jinping endorsed a global effort to crack down on international tax avoidance.