China is preparing to take a series of measures to fight against tax evasion by overseas-funded companies.

A majority of overseas-funded companies may honestly pay their taxes, an official with the State Administration of Taxation (SAT) said in a telephone interview, but a small group of overseas-funded companies has allegedly tried to evade taxes.

To beef up anti-tax avoidance efforts, the government plans to increase supervision on tax sources, said the official who declined to be identified.

Previously, the government required companies to report taxes themselves, then conduct tax assessment and occasional spot checks on these companies, she said.

"The tax assessment system has proven a powerful supplement to the existing tax collection system," she said.

The tax assessment system requires taxpayers to calculate how much to pay, the official explained. The tax bureau is required to conduct random checks to ensure honesty.

By introducing a preliminary assessment on accounting materials presented by taxpayers before tax inspectors go hunting for fraud, tax authorities can keep close watch on tax sources, tighten control on tax evasion and distinguish between tax dodging and honest mistakes, she said.

"In the process of tax assessment, tax collectors should have a clearer understanding of the taxpayer's business condition by analyzing taxation and accounting indices, which makes it easier to detect tax evasion," she said.

Tax officials also have time to discriminate between unintentional misrepresentations from tax evasion attempts before the taxpayers are wrongly punished, the official said.

After going through the process of tax assessment, tax inspectors should zero in on major suspected tax dodgers, she said.

"While the Chinese Government is trying to create a better tax environment for foreign-funded companies, some companies took illegal measures to avoid taxes," the SAT official said.

The official could not provide an accurate figure for the amount of taxes evaded by these companies each year.

An earlier figure suggests that illegal tax avoidance may have resulted in an average loss of 30 billion yuan (US$3.6 billion) a year from State coffers.

Ni Hongri, a senior research fellow with the State Council's Development Research Centre, said the loopholes in the existing tax laws, the low cost of evading taxes and a small group of tax officials' corruption were the major reasons for some foreign-companies' illegal tax avoidance.

The lure of maximizing profits led some foreign companies to ignore some tax requirements when they discovered the cost of evading taxes was lower than the benefit of paying, she said.

Liu Huan, professor of the Central University of Finance and Economics, said most overseas companies which avoided paying taxes did so through transferring pricing with "relative" companies such as subsidiaries.

Other foreign firms are importing raw materials at a high price and exporting products at a low rate to avoid paying tax, Liu said.

An official with Deloitte Touche Tohmatsu (DTT) said tax avoidance through inter-company transactions is a common practice in overseas markets.

Multinational companies often produce, process and sell products in different areas, the official said.

They generally seek advice from professional accounting firms to determine the transfer prices between different areas, he said.

Tax advisers can help corporations optimize transfer pricing and minimize overall tax payments, he said.

While foreign investors generally are concerned about how much they have to pay in taxes, they do not come to China solely because of low taxes, he added.

Prudent investors, he added, consider first the investment environment, market situations, infrastructure and social and political stability.

(China Daily July 7, 2004)