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Taxing test for Chinese firms going global
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CHINESE outbound investment is in full swing.
According to the Ministry of Commerce, Chinese investors poured a record US$170 billion into more than 8,000 businesses in 164 countries and areas around the world last year.
In the meantime, they also went on an M&A binge, completing 729 deals that amounted to a whopping US$430 billion. Among recipients of this huge amount of investment, 65 countries along the Belt and Road, China’s signature economic initiative, have increasingly become a hot destination for Chinese capital.
Nonetheless, their levels of economic development vary wildly; enormous differences between tax systems are identified as a compliance risk.
Top tax experts and business leaders from a handful of companies recently gathered at the Shanghai National Accounting Institute to share their insights into the accounting risks arising from Chinese corporations’ increasingly globalized operations.
Fu Junyuan, executive director and CFO of China Communications Construction Company, an infrastructure consortium, argued that due to the media exposure the B&R is getting right now, many Chinese projects are cast under the spotlight. This is especially true in certain countries, where foreign investments are sometimes viewed with cynicism or at least subject to extra scrutiny. A slight misstep could lead to a string of debacles, said Fu.
He told the audience that countries along the B&R belong to different tax systems based on their historical legacies, customs and languages.
For example, the Russian accounting system carries on in much of Eurasia, while a large portion of Francophone countries in Africa owe their accounting methodology to the former French colonists.
Enhancing risk awareness
The varied systems and the fact that they are often not well-aligned means that Chinese businesses with a global profile have a lot to do in terms of adjusting book-keeping practices and meeting local tax compliance targets.
“Regulatory authorities in quite a few (B&R) nations care more about illegal tax evasion or irregularities than transparency in information disclosure,” said Fu. He thus advised Chinese investors, traditionally fixated on legal and accounting issues, to raise their awareness of taxation risks.
Chen Hu, vice president of Chinese telecommunications giant ZTE, pointed out in his presentation that Chinese businesses face a steep learning curve on their way to becoming multinationals.
“Doing business at home is like sailing in the river, but once a company goes global, it begins navigating immense and rough seas — it’s much, much more challenging,” said Chen, whose employer has set up offices in 53 out of the 65 B&R nations.
The challenges mainly come from surging operational costs and a greater deal of difficulty in corporate governance. Poor alignment of distinct accounting systems translates into higher business costs and a lack of consistency in accounting standards.
This can be partly overcome with the establishment of an integrated global accounting network that enables accountants to work across time zones, cultural and language barriers. This is something already on the agenda of many Chinese multinationals, said Chen.
Another way to deliver better corporate performance on taxation is through the localization strategy.
Sending an experienced Chinese accountant to work in an overseas location is normally several times as expensive as hiring local staff. Besides, a firm cannot call itself a multinational or corporate citizen if the majority of its staff is not locally recruited, Chen noted.
Since many corporate Chinese investors specialize in infrastructure, their concerns and complaints are largely concentrated in the area of EPC, or engineering procurement construction, said Zhu Qing, professor of Renmin University of China and a global tax expert.
Zhu said he had been approached by a number of Chinese managers who sought help to resolve the tax conundrum they encounter in EPC projects.
Suppose a Chinese company wins the bid for a US$1 billion EPC deal. An estimated US$200 million will go to engineering, another US$200 million to construction, and the remainder to procurement of equipment from China.
Proceeds from the first two parts are taxable. The tricky thing is, if the equipment is not bought via a so-called permanent establishment (PE) set up in the host country, profits are exempt from taxation according to global tax conventions.
But given that many Chinese infrastructure companies are engaged in building dams, highways, power plants and other facilities that usually take years to build, they are occasionally considered to have a PE, in other words, a reason for taxing them.
Lawsuits are regularly filed. Some are won, some are lost.
All in all, this complicated dimension of international taxation is worthy of closer inspection by Chinese firms intent on going global, Zhu observed.
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