China taking multinational corporations to task on tax

This has been brewing for some time. An extensive audit has begun in China of transnational corporations (TNCs) shifting profits for service fees and management fees that are paid to related parties, often in tax havens offshore.  

The tax audits cover a period of ten years, from 2004 to 2013, and include all payments made to related parties over that span of time. Many TNCs are now expecting major assessments from China if the business purpose for these payments cannot be established. Interestingly, China is also taking a stance that all management fees should be denied, as they should be treated as stewardship expenses and necessary for the conduct of its global business. China believes that such costs should not be charged to subsidiaries in China.

For more details, see this PwC analysis here.

Now whatever the reasons for China’s stance, or the particular outcomes, it’s worth asking: imagine if all countries took a similar stance. Why wait for the OECD’s BEPS process to unfold, with the OECD telling the (mostly OECD-based) TNCs to behave a little better?

Developing countries can take control of their own destinies, and these issues are very much in their control.  It seems that at least part of the issue is about the OECD’s unworkable methods themselves.

We have presented alternatives to current practices, as well as to the entire OECD-led approach, in articles such as this one, focused on developing countries, or this one, focused more generally.