China Tax Reductions: Look This Gift Horse in the Mouth

The tax man cometh and taketh away. ALWAYS.

There has been a lot of press lately China reducing business taxes to stimulate its declining economy. This is all well and good but when it comes to taxes — especially China taxes — there ain’t no such thing as a free lunch.

Yes, China is reducing various VAT rates and mandatory employer pension contributions, but it also is moving apace in tightening up its tax enforcement capabilities and these enforcement changes will and already have impacted foreign businesses more than the tax reductions. As our regular readers know, we have for at least a decade written how China has consistently tightened its laws and its law enforcement, especially as against foreign companies. See e.g., Doing Business in China Without a WFOE: Will the Defendant Please Rise.

Official Chinese publications on its tax decreases talk of how tax collections will actually rise, due in part to changes in law to force individuals and businesses onto China’s tax “grid” and due to stepped up tax enforcement. For an example of legal changes that will bring “hidden” businesses to light, check out China’s Daigou Shopping Model. The Bank of China recently issued a notice requiring China’s banks report all transactions exceeding certain amounts with the plan for some of the accounts involved in those transactions to be turned over to the tax authorities for further investigation. Foreign companies, I’m talking to you.

Foreign businesses operating in China can and must protect themselves by doing the following (somewhat obvious) things:

1. Determine whether you are or are not doing business in China. If you have anyone on the ground in China on behalf of your company you probably are doing business in China and you owe all sorts of taxes for that. See againDoing Business in China Without a WFOE: Will the Defendant Please Rise.

2. Hire a good accounting firm and a good bookkeeper to make sure you are doing everything right on your China taxes.

3. Don’t listen to anyone but your own accountants and bookkeepers and lawyers about what you should be doing regarding your China taxes.

4. Just because you know others who are not paying certain taxes does not in any way justify you not paying those taxes.

5. Be wary of anyone — inside or outside your company — who in any way minimizes the need to pay China taxes.

At the end of 2018, in How’s Your China WFOE? Please Check, we wrote of how “at the end of every year, our law firm always gets a slew of emails and phone calls from foreigners in big trouble in China.” The post then talked of how “in past years the trouble has mostly involved unpaid taxes, usually with the following sort of scenario:

Foreigner calls to say they are in their home country for the holidays and they have learned that Chinese tax authorities have come by to discuss the company not having reported all of its China earnings. The person wants to know whether it is safe for him (it has 100% of the time been a male) to return to China. Three more minutes of talking usually reveals this company has not come close to paying its China taxes and the person on the other end of the line “justifies” this by saying his Chinese accountant told him that “nobody pays these taxes.” I then tell this person that the Chinese government LOVES going after foreign companies that don’t pay all their taxes and that it has gotten really good at catching those that don’t. I then tell him that he absolutely should not go back to China unless and until his company has cleared up all back taxes, with interest and with penalties.

Though we are not even three months into 2019, we have already gotten more tax trouble calls this year than all of 2018. These are calls involving employer taxes, company and personal income taxes, and custom duties. And in nearly every instance, the problem has stemmed from a foreign company (so far just North American and European companies) not paying taxes based on some misguided belief that no taxes were owed. Do not choose your accountant based on an “ability” to save you money. Choose an accountant who provides you with the real life advice you need.

Be careful out there.

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