New Cross-Border Taxation Efforts in China

April 8th 2014

China, the world’s second largest economy, has taken several steps to battle the issue of cross-border tax evasion. As of 2013, China formed agreements with 46 nations to share tax information.

Leading the efforts is tax Commissioner Zhang Zhiyong, who said that China has a responsibility to strengthen its international tax collection efforts.

As of 2011, China was losing approximately US$134billion each year in tax revenue, making it the world’s 8th largest tax loser, only 7 steps ahead of number 1, the United States, who reported approximately US$billion in lost taxes.

China along with the rest of the G20 nations signed an agreement to increase efforts to prevent tax evasion through fraudulent conveyance.

The agreement stipulated that the 20 strongest economies including the United States, will maintain a collaborative sharing relationship in order to fight international tax crime. The efforts will focus not only on foreign investment in China (companies/multinationals) but also, Chinese citizens living overseas. Like the U.S., China taxes its citizens on worldwide income.

China in general has been a preferred spot for foreign investors due its economic stability, good infrastructure, skilled workforce, and of course, a very large population.

Since joining the World Trade Organization (WTO) in 2001, China has steadily seen an increase in foreign direct investment. Foreign investment rose by 5% in 2013 from the previous year, netting a total of almost US$billion.

However, with the renewed focus on international taxation by the Chinese government, the questions that come up are: will the new tax efforts on cross-border transactions be enough to discourage multinationals from investing in the China? And what will this mean for Chinese nationals living and working abroad?

U.S. citizens are currently experiencing the effects of FATCA (Foreign Account Tax Compliance Act). FATCA, implemented to discourage tax dodging by U.S. citizens living abroad, requires foreign banks and financial institutions to report information of all U.S. account holders (individuals and businesses) to the United States treasury. To read more about FATCA, view our previous blog, F-Day Confirmed

Chinese nationals and permanent (long-term) residents are liable to be taxed on income earned outside the country. For Chinese nationals living in the U.S., double taxation of income will be avoided through the U.S. – China income tax treaty.

Non-permanent residents (non-domiciles) who reside in China for a full year within a calendar year are also liable for taxation on income earned outside the country provided that the income is paid by a Chinese entity.

As 46 countries continue to share banking information of Chinese individuals and businesses, China’s enforcement of cross-border tax laws are yielding strong results. In 2013, the country recovered US$899M in lost taxes, 37% more than was recovered in 2008.