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China will put into practice a stricter system to collect taxes from companies as of October 15. Premier Zhu Rongji announced the details of the new system Tuesday.
The new system requires that companies register themselves at tax departments within 30 days after receiving their business licences.
Otherwise, they will be unable to open bank accounts, apply for tax reductions and exemptions, or conduct other tax-related business.
Taxpayers, who try to avoid registration, will have to pay overdue fines in addition to their taxes, and relinquish their tax registration certificate, invoices and other tax documents to tax departments.
The system requires that taxpayers install and use tax data equipment and send tax data to the tax departments.
Multinational companies that make use of "affiliate" companies to evade taxes, will be punished.
Premier Zhu said that strengthening the taxation system and its management is an urgent task for local governments to increase revenue and push for sustainable and sound economic development.
Tax evasion has been a serious problem in recent years in some private and foreign-funded companies as well as State-owned companies in some key industries, experts said.
They estimate that China loses 30 billion yuan (US$3.6 billion) in tax revenues annually through the tax evasions of multinational firms alone.
Liu Heng, a professor at the Central University of Finance and Economics, said: "Some foreign firms are importing raw materials at falsified high prices and exporting products at false low prices to avoid paying taxes."
Some firms also take advantage of differences in other countries' methods of making financial settlements and accounting systems, Liu said.
Companies often transfer revenues to capitalize on lower tax rates in other countries and regions, Liu said.
Tax avoidance through inter-company transactions is a common practice in overseas markets, said Alan Tsoi, deputy managing partner of Deloitte Touche Tohmatsu (DTT).
Multinational corporations often produce, process and sell products in different areas, Tsoi explained.
"They generally seek advice from professional accounting firms to determine the transfer prices between different areas.
"Tax advisers can help corporations optimize transfer pricing and minimize overall tax payment," Tsoi said.
There are no distinctions between tax evasion and tax avoidance under China's existing laws, Tsoi said.
Tax avoidance is a common international practice, and preferential tax treatment helps attract foreign investors, he said.
"While foreign investors generally are concerned about how much tax they have to pay, they do not come to China solely because of low taxes," Tsoi added.
(China Daily September 18, 2002)
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