China is Coming After Foreign Companies for Underpaying Taxes

China is Coming After Foreign Companies for Underpaying Taxes

In a series of public spats, China has gone after some major US companies and their overseas divisions for underpayment of taxes. Last year, the Chinese government handed Microsoft a $137 million dollar tax bill. Last week, China ordered Apple to pay 71 million in taxes that the country claimed were owed from 2013.

Whether this increased scrutiny is caused by the current Chinese slowdown is up for debate. During a recent CNBC interview, an Apple spokesman stated that the company had “a difference in interpretation of a tax rule,” adding that the balance was paid “with interest” and that the company pays “all the taxes we owe wherever we do business.”

A recent NY Times article highlighted how cheating on taxes is “hard to do” since everyone is doing it. It all revolves around invoices called “fapiao” and the many ways to evade the reporting requirements. Common processes involve off-book accounting, or not printing all of the necessary “fapiao” for every transaction.

US companies must make sure they are operating legally with regard to employees and hiring. Many Chinese accounting firms cheat the rules and do not provide honest advice to foreign entities. In a recent article on China Law Blog, the writer quoted a correspondence wherein a Chinese-based accounting firm advised their client that “we do not need contracts with all of our workers, but just with a few key members of our staff. So out of our 75 workers, only 16 have contracts.”

In response, the law firm of Harris & Moure, pllc advised, “All of your employees should have had written contracts (in Chinese). Failing to have a written contract opens your company up to substantial penalties.” This really is about the taxes required to be paid on all employees and the way Chinese-based firms get around it.

This is just another example of the Chinese government cracking down on foreign companies with Chinese affiliates. Just because this is the way Chinese companies run their businesses doesn’t mean the Chinese will let outsiders get away with the same shady behavior—especially if money is getting tight.

Will the current Chinese economic pull-back create even greater oversight? Wall Street likes to say you can judge the Chinese GDP not from the official press releases, but by the amount of power being used. Or perhaps now you can judge the Chinese GDP number by the increased crackdown on “underpayment” of taxes.

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