Foreign tax audits on the strengthening of Thinking

Abstract: This article from the main form of foreign tax havens to start discussion, analysis of the failure of foreign tax audits, tax audit made recommendations to strengthen foreign and measures.

In recent years, China's opening up and increased the intensity of foreign Investment, foreign Investment in China joint ventures and wholly owned enterprises is increasing. However, foreign-invested enterprises to avoid the phenomenon of more and more serious domestic taxes, tax shelters have been " Innovation. "
First, the main form of foreign tax
1. Using a permanent establishment tax. The one hand, transfer of profits by foreign investors, causing losses for several years within the corporate book or man-made increase of loss, and finally to maintain profit or break even the state, to enable enterprises to defer into profit year tax holiday to a long period to achieve tax avoidance purposes. On the other hand, royalties for the information and some in China are not included in royalties for the use within the non-patent technology and goodwill and other costs paid, If the head office as a cost or Investment, the interest borne by a permanent establishment can be deducted from its income, which can reduce income tax evasion of .2. avoidance through related party transactions. First of all, raise the price of imported equipment , inflated Investment in fixed assets. China's foreign-invested enterprises are generally in order to provide all or part of the advanced imported machinery and equipment as an Investment in shares. because the Chinese do not understand the performance of the international equipment and price, it is difficult to value accurately. so outside any party can raise the price of machinery and equipment to enable enterprises to inflated fixed assets, depreciation any more, tax less, while foreign Investment is higher than the actual gain dividends and bonuses, so the Chinese side lower earnings interests. Second, high imports and low prices out of the transfer profits. in foreign-invested enterprises, the Chinese lack of international supply and marketing channels and do not understand the international market prices, and more to rely on foreign imports of raw materials and parts, exports of finished products. In this way, foreign will control the purchase and sale of the enterprise, any raise prices of imported raw materials, finished goods prices down, making almost the same share selling price, export price or even false, in fact, be exported by the high prices associated enterprises, the enterprise is not profit, which the enterprise of natural escape income tax .3. the use of tax avoidance provisions vary. First, the use of tax incentives tax avoidance. China enacted in 1991 <<Foreign Investment Enterprises and Foreign Enterprises Income Tax Law "> states: Where a new production run of the enterprise with foreign Investment more than 10 years, from the profit can enjoy the 2-year exemption and 3 years of preferential treatment of income tax by half. So foreign investors started from 6 years from the time the full tax, or suspension of the factory, to find a new co-operation object re-Investment; or their business set aside the main workshop, a slight increase in funds and equipment, no change in product distribution channels based on the establishment of the so-called "new independent accounting units", again enjoy tax benefits, to tax avoidance. s Second, the use of "appraised" tax avoidance. some processing enterprises in the tax relief expires, to continue to enjoy tax incentives from the purchase of quality products overseas affiliated companies, its commentary on the export of advanced units, to obtain tax relief concessions. Third, the delay control of profits to tax debt. in duty-free raw materials of non-payment of foreign money, corporate book profits to expand, foreign by the net profit. When entering the tax in the late, put losses are the "current account" stage payments, there are plans to offset the tax on corporate profits, reduce the tax burden. Fourth, the use of covert tactics to evade the tax payable contracted projects. The first is to transfer the material into the price of labor costs. Contracted construction of tax Law, can deduct part of the cost of construction materials after the tax. So contracted projects with foreign investors to raise cost of construction materials as much as possible to reduce labor costs, labor costs will shift cost of construction materials to expand the material allowance to reduce taxes. or by the labor and materials engineering the total contract tax, contracting not-included tax according contracting part of the price. So the actual labor and materials of foreign works, under the guise of the name of scoring the three contracting, and materials contract to reduce the tax burden. Fifth, the use of preferential free trade zone avoidance. implemented in different places of different tax incentives, foreign companies operating point will be located in the bonded area, place of origin in the production of raw materials, manpower relative concentration of high-tax areas, shall enjoy the tax benefits of low tax jurisdictions. Sixth, false loss of property to tax avoidance. our tax Law, business transfer or dispose of property should be included in the year the net profit or loss. Foreign false property loss by this provision, early retirement or loss before tax, but did not deal with proceeds of the recorded in order to reduce taxes. Seventh, reduced equity financing to expand the loan financing. in accordance with the provisions of tax Law, shareholders equity Investments made through the dividend distribution of after-tax profits of enterprises, not the amount of taxable income from the enterprise charged in advance. And Investors received the form of loans but the interest can be classified as finance charges, deducted from taxable income. foreign companies to avoid tax, the tax burden on the use of two different forms of financing to be in the form of shares of the capital invested into the form of loans, artificially increase the business costs, reduce the taxable profits of enterprises .4. use of loopholes in tax collection. First, representative offices of foreign enterprises in China, not directly through the office to purchase raw materials or sale of goods China does not use a "gravity principle", that is, foreign companies have a permanent establishment in China, but China's access to and the agency and is not included in the permanent establishment taxable income to evade taxes. representative offices of foreign enterprises in China is due to the amount of expenses taxable income to share with less or no cost-sharing to avoid our taxes. Second is the use of invoices, receipts to evade taxes. The current tax authorities of foreign-invested enterprises, "make the development of votes" is still a lack of effective monitoring, coupled with the computer print invoices appears, provided the conditions for foreign tax. third is to use some of the provisions of international tax treaties for avoidance. of tax Law: Resident taxpayers who bear unlimited tax liability; non-resident taxpayer, negative limited tax liability. Some foreign investors have adopted underreporting residence time, or use of our lack of connection between regions, between different regions in the flow of living, making it a non-resident taxpayer, the taxpayer to achieve its purpose only a limited negative .5. by underground to evade tax. Currently, almost every country in the world, there is considerable amount of underground Economic activities, such Economic activity completely avoid the government's management, including to evade all taxes. evade foreign taxes that way, often with the immigration smuggling combined.

Links to Research Papers Download http://www.hi138.com II Failure of foreign tax audit 1. Of foreign tax issues have not yet attracted sufficient attention. Over to speed up regional Economic development, strive to attract foreign investment. Some administrative leadership to accommodate foreign investors holding tax avoidance attitude, and even the tax authorities according to law to be improper interference. Local Government assessment of foreign investment not only on the number of quality, future development of those projects do not open the "green light" for the future of foreign tax avoidance, withdrawal of funds for potential problems. There are also some local governments that tax incentives for foreign concessions is not their strict law enforcement, thus seriously affecting the investment environment in China, resulting in lack of confidence of foreign investors have tax avoidance. According to reports, a number of multinational companies using illegal means of tax avoidance, tax revenue each year caused losses of up to 127 billion yuan or more. This can not but our attention .2. international Economic complexity of the business to improve audit difficult. With the acceleration of globalization, foreign-funded enterprises often use a complex international environment, frequent related party transactions, arrangements or from investment sales activities in a global perspective , flexible scheduling cross-border funds, "cost flow, income outflows," the phenomenon of repeated, resulting in a large number of state tax revenue flight. auditors in order to cross-border thoroughly investigate such cases, the difficulty of ineffable .3. audit basis are not adequate. inside and outside the sub-sets of corporate income tax, even if the complexity does not help the tax system fair competition among enterprises. shall be consolidated as soon as possible within the enterprise income tax, while a large difference in income tax law should tax incentives to make the necessary adjustments to create a more rational and scientific The tax credit system .4. poor cost-effectiveness of the audit. Why foreign companies can often drilled to avoid tax loopholes? tax incentives has long been all over the preferential policies in attracting foreign investment as the first time, the local government a de facto tax on the connivance of foreign , making them low cost of tax evasion. It was calculated that on average each existing foreign-funded enterprises is the probability of being audited once in 800 years, which makes foreign long will formulate the "tax avoidance schemes" into the corporate management agenda openly .5. Internet use increased audit risk. Internet penetration is closely related with Economic globalization, however, Internet technologies in business use, the lack of rules and constraints, the traditional revenue management of the risk of destruction. Once the tax people in the global implementation of tax evasion, the traditional audit methods would be meaningless, since the problem of uncertainty increase, the audit risk is increased.

Third, efforts to strengthen the foreign tax audit recommendations and measures
1. Improve audit basis. Especially the improvement of foreign-related tax laws, reduce and eliminate tax loopholes. Inadequate on some of the provisions in the tax laws should be modified: First, determine the correct tax incentives, tax incentives should be conducive to our goal of attracting foreign investment achieved without compromising the national interests; the second is to amend the registration of enterprises with foreign investment procedures, to prevent the counterfeiting of foreign tax relief for new businesses fraud, the law should establish an independent corporate enterprises of old enterprises to develop specific terms; Third, the gradual unification of the two foreign sets the tax system, to "the principle of universal benefits" for the "special offer" principle of foreign special offers given to certain industries in order to guide foreign investment into our country much-needed energy and transportation infrastructure; Fourth, capital and debt ratio requirements for foreign The "thin capitalization" of tax avoidance, it should be clear that the ratio of debt capital. the burden of debt interest than some of the tax deduction can not be levied on personal income tax .2. to strengthen the establishment of verification system. for foreign use of inflated increase in the value of fixed assets depreciation and other tax issues, for by strengthening the work of registered capital verification solution. verification is testing the first foreign investment in the work, not strict to endless trouble. In line with the new tax laws to prevent the counterfeiting of foreign relief for new businesses cheat taxes, for foreign investors, "thin capitalization" of tax avoidance, can also enhance the establishment of verification, so that the new tax law effective implementation of .3. attention to foreign-funded enterprises and Internet related party transactions. related party transactions of foreign capital and the Internet to avoid tax evasion The "security barrier." because the audit is difficult, involving a wide range, audit the high cost of foreign transactions by related parties and the Internet can often successfully avoid tax evasion. auditors should strive to carry out international cooperation in the audit business, critical review of foreign-funded enterprises purchase invoices and sales operations, to prevent the transfer of profits to international prices using the illegal acts of tax avoidance, and resolutely clear the Internet site of the suspicious activities, to prevent it from becoming a professional tax havens, tax revenue for the state build invisible "firewall" .4. cultivate foreign investment corporate auditing expertise. foreign audit specialists must be familiar with the English language, computer networks, electronic commerce, tax laws and audit expertise of senior professionals. formulate a reasonable incentive system, and vigorously cultivating talent, proper guidance in the audit practice Audit forces, this is the work of foreign tax audit critical issues facing the .5. to change the audit policy, focusing on small and medium taxpayers .6 review. strictly invoice management, carrying out analytical review audit. to establish a single taxpayer registration system, including the legal representative of the name, business name, address, and tax payable, establish tariff system, strict management of invoices. the theoretical amount calculated based on the invoice, and the actual amount collected for analytical review, according to the difference between the estimated tax evasion case. This is a clear audit focus and improve audit efficiency provide the basis for .7. strengthen the cash audit, regulate foreign economic activity. foreign underground transactions are often conducted through cash. Review of the unlisted foreign coffers, the cash trading business concern unreasonable, especially against foreign-funded enterprises escape the control of foreign exchange transactions with the illegal underground banking, the loss of state tax revenue is strong protection measures. auditors cash foreign-funded enterprises should be strengthened review, regulate their economic behavior, in the countries to strengthen foreign exchange control, the financial system in the larger environment , will be able to set audit objectives.

References:
[1] <<tax avoidance and prevention>> Pretorius Economic Management Press, 1994 (1);
[2] <"New tax avoidance and anti-avoidance practices>> Man Li, China Audit Publishing House Fan Hongguo 1999 (5);
[3] <<Auditing>> the Chinese People's University Press, New Song Chang Geng 2002 (6);
[4] <<foreign companies up to 127 billion yuan in tax avoidance, is home of national enterprises in the woods>> China Securities Journal 2006--01--23.

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