When is a Chinese company not Chinese? When it’s a complex web of offshore vehicles rooted in anonymous tax havens. That description includes some of the People’s Republic’s most successful and innovative companies. It will make the country’s apparent new push on tax evasion hard to enforce.
Authorities have extracted 840 million yuan ($137 million) in unpaid taxes from a multinational identified only as “M Corporation”, state newswire Xinhua reported on Nov. 23. The company artificially depressed its taxable profit in China by paying high fees to its U.S. parent. China outlawed that kind of transfer pricing as early as 2008. But policing is hard, because foreign and local companies have got used to fiendishly complicated structures spanning several jurisdictions.
In many cases, that’s helpful rather than harmful. The Cayman Islands or the British Virgin Islands have little red tape, making it easier for companies based there to set up quickly, work around onerous local rules and tap foreign capital via stock exchanges in Hong Kong or the United States. Without convoluted chains of ownership and influence, successful Chinese companies like Alibaba, Tencent and Xiaomi might not exist.
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