Knock, Knock? Who’s There? China Tax Police

I had a conversation the other day with a leading journalist on how both of us are always right about our predictions. I joked that the beauty of writing is that all we need do to show how right we are is to highlight the predictions on which we were right and to let cognitive dissonance wash away the rest.

Damn, but I was right to predict 2010 would be the year of increased taxation/regulation of foreign business in China. And I have third party proof in the form of this article over at Shanghaiist, where I made the following as two of my five predictions in China Business Law Trends of 2010:

China will increase its efforts to root out and shut down illegal and unregistered foreign businesses. I have seen ample evidence of this already happening in the last 3-6 months and I have no doubt this will continue. Providing jobs to Chinese citizens does not let you off the hook.

China will increase its tax collection efforts. This has been going on at a rapidly accelerating pace over the last six months or so. If your China operations are not making a healthy profit, do not be surprised if the government imputes healthy profits to it. In particular, the government will look very closely at your transfer pricing and in many cases it will not like what it sees.

Both of these two things have been happening in obscene numbers over the last two months. My law firm is receiving at least triple the usual number of inquiries from foreign companies that are being told to register their businesses and pay past taxes and fines or get out of China. But it gets worse, as one CEO is sitting in prison until his company pays its tax penalty.

How did the Chinese tax police catch these foreign companies? Knocks on the door by tax inspectors who, by all indications, are simply going door to door in office buildings and areas where foreign companies tend to locate/congregate. One of these companies is a client for whom we have actually completed about 98% of their registration. The others are all companies that wrongly believed they would be able to operate under the radar for a while.

China Economic Observer just came out with an article, China Launches Second round of Taxation Inspections in Bid to Boost Revenue, noting how China’s tax authorities have been told to collect “additional taxes” this year by targeting “key industries.”

Now I know that my perspective is heavily slanted, since none of our Chinese clients would be calling us with an internal Chinese matter, but it sure “feels” like key “industries” means foreign companies.

What are you seeing out there?

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