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A foreign company in the furniture business in Shenzhen was caught recently by a Shenzhen tax authority for concealing profits, part of the government's efforts to crack down on tax evasion by multinationals.

The company agreed to pay some 270,000 yuan (US$33,292.23) for its taxable income of 1.82 million yuan for 2002, to the Shenzhen branch of the State Administration of Taxation (SZSAT), the Shenzhen Special Zone Daily reported, saying that SZSAT did not wish to make public the name of the tax-evading company.

Founded in 2002, the company reported a loss of 800,000 yuan with a turnover of 18 million yuan its first year. The claimed losses deepened to 1.53 million yuan while its sales climbed to 116 million on its balance sheet for 2003. The company finally claimed a profit of 380,000 yuan on a revenue of 122 million yuan, according to its 2004 financial statement.

An anti-tax-evasion team of SZSAT, which began auditing the company in August this year, found evidence of tax evasion by transfer pricing (juggling expenses and profits among a multinational's different operations), a common tool for tax avoidance used by multinationals.

SZSAT's local counterpart, the Administration of Local Taxation of Shenzhen (ALTSZ), has collected 400 million yuan in taxes from adjusted profits of 4 billion yuan from more than 100 enterprises with foreign investments since 1996.

Tax evasion through transfer pricing accounts for 60 percent of total tax evasion by multinational companies, according to an analysis of the national tax administration. Multinational companies in China also evade taxes by dilution of capital, such as interest-free loans to subsidiaries.

"Transfer pricing is very common among multinationals in Shenzhen," said David Chen, a tax-division partner of PriceWaterhouseCoopers, who added that the tool for tax planning is not necessarily illegal.

Multinationals tend to maximize their profits by tax mitigation arrangements through exports to their Hong Kong subsidiaries or technology transactions (such as royalty fees) and services to their overseas parents, said Chen.

Shenzhen leads other domestic cities in cracking down on tax evaders. Last September, ALTSZ signed a bilateral advance pricing arrangement with a Shenzhen unit of Toshiba and the Japanese tax authority, making the city the first in China to ink such a deal.

The arrangement allows the taxpayers and tax authorities of the two countries involved to set out, in advance of inter-company transactions, the method for determining and calculating the transfer pricing for such transaction.

"Many major international companies welcome the arrangement as it will enhance operation stability and lower risks," said Zeng Lixin, a section chief of ALTSZ and anti-tax evasion expert.

(Shenzhen Daily December 31, 2005)