The State Administration of Taxation (SAT) will amend anti-tax avoidance clauses within the year, Beijing News quoted an official as saying last Friday.

The administration plans to renew and adjust its definitions of relationships between companies, add a new clause that curbs tax avoidance through tax havens (applying to foreign holding companies as well) and a new clause that limits capital weakening.

Foreign firms avoid 30 bln yuan tax

Su Xiaolu, an SAT expert specializing in anti-tax avoidance research, estimated that foreign firms avoid paying 30 billion yuan in tax in China.

He listed frequently used methods as reduced transfer prices, tax havens, capital weakening, carrying profits forward and taking advantage of loopholes in turnover tax collection procedures and local favorable tax policies.

Of them, he said reduced transfer prices among related enterprises were most frequently used.

His estimate is based on the number of foreign-funded enterprises in China -- over 480,000 -- and their combined annual reported losses two years ago of over 120 billion yuan (US$14.85 billion).

Su speculated that current losses would be even higher now, given the increasing number of foreign-funded businesses nationwide.

Su said tax bureaus would prioritize supervision over companies that: report large losses; have frequent transactions with those in tax havens; have increasing revenue but are seldom profitable; or have steadily growing revenue but small profit margins.

System set up to monitor transfer prices

The SAT has already amended some clauses of Taxation Management Regulations on the Transactions Between Associated Enterprises and the draft Working Procedures Concerning Tax Audit on the Transactions Between Associated Enterprises.

The first regulation stipulates that when dealing with cases concerning transnational companies, tax bureaus can go abroad to investigate with SAT approval. Related information can also be collected through Chinese economic institutions in foreign countries.

Currently, the SAT has established a transfer price audit system, and it will conduct investigations according to enterprises’ financial reports.

The administration will primarily select over 10,000 enterprises nationwide, whittle this down to 1,500-2,000, and then finalize the list of key industries and key enterprises for audit each year.

It will then conduct on-the-spot audits, negotiations and administrative reconsideration of their situation with regard to tax.

(China.org.cn by Tang Fuchun, December 2, 2005)