Agency France Presse

Beijing, July 5:

China is launching a probe into tax evasion by multinational firms which is estimated to cost the government 30 billion yuan ($3.6 billion) in lost revenue every year, state media reported today. The China Business newspaper, citing the State Administration of Taxation, said the tax office would focus its investigations on foreign-funded firms that are expanding their presence here despite posting consecutive losses. It is also formulating a series of specific rules to curb tax evasion by foreign firms in China. China has approved the establishment of 400,000 foreign-invested firms, with about 60 per cent of them operating in the red to post a combined annual loss of 120 billion yuan, the report stated.

It is widely believed that the majority of apparently loss-making foreign companies are actually performing better than they are reporting to the taxman. Most of these multinationals evade tax payments through related-party transactions such as massaging the costs of imports upwards, while others are believed to be skirting tax payments through legal loopholes, the report stated. China has been trying to attract foreign investment into the country through tax sweeteners, such as by waiving income tax for the first two years after establishment and half rate income tax for the following three years. “Some foreign-funded firms have chosen to close down their operations in China after five years and then re-open a new firm in order to get the tax benefits again,” the newspaper reported.