UpdateChina airs plan to help close multibillion-dollar corporate tax loophole
Authorities answer OECD call to clamp down on corporate grey area of internal transfer pricing with proposal for tougher reporting standards
China is mulling plans to tighten tax reporting requirements on multinationals operating in the country to help close a massive global loophole.
If the plan goes ahead, multinationals would have to file extensive reports on internal pricing and costs between overseas branches and headquarters, sources said.
The plan is China’s contribution to a global effort to stamp out the common practice of multinationals altering the price put on labour, services or intangible asset transfers within global operations to allow firms to divert profits to low-tax countries.
The Organisation for Economic Cooperation and Development estimated that these kinds of profit-shifting practices amounted to about US$100 billion-US$240 billion in lost tax revenue each year, equivalent to up to 10 per cent of global corporate income tax revenue.
A source at a law firm told the South China Morning Post that the State Administration of Taxation issued a consultation draft on the proposal at the end of last year, specifying that multinationals would have to disclose affiliated businesses and how intangible assets, labour and other internal cost transfers were made. “[Internal transfer pricing] is a grey area to utilise loopholes in tax rules between different countries, but now the governments [of those countries] are acting to close the hole,” the source said.
China’s biggest tax reform for 20 years set to buoy growth
The OECD has been pushing for countries to set universal reporting standards to close the loophole since 2012.