Taxation Storm in China: New Regulations concerning Resident Enterprises and Special Tax Adjustment
January 8th 2009, the State Administration of Taxation (SAT) issued “Implementation Measures for Special Tax Adjustment Regulation (Interim)”, making detailed specifications on special tax adjustment issues such as enterprise transfer pricing, cost-sharing agreements, controlled foreign companies and thin capitalization, as well as general anti-tax evasion matters. In April, SAT issued a notice which clearly defined that Chinese controlled enterprises registered abroad should be determined as resident enterprises on the basis of their body of actual management.
Because of the economic downturn, tax collection is under severe pressure. Hence the Government introduced new regulations quite frequently this year in the hope of plugging the source of tax evasion on the policy level. In the long run, the tax law amendments would only tend to be more rigorous. The old maneuvers, for example, of simply setting up offshore companies, hiding tax sources, or transferring profit will get nowhere. The pursuit of more sensible tax planning is the global optimization, both in form and essence of our business.
Tax Fraud by American UBS Clients
February 19th 2009, UBS admitted guilt in having participated in “a fraudulent plan against the U.S. Government”. It handed over the account data of its 250 American clients who were suspected of tax evasion, and also paid a fine of 780 million Swiss francs, in an attempt to settle the series of taxation disputes starting from 2008 since a former UBS private banking sector manager had assisted a Russian real estate businessman to evade U.S. Internal Revenue Service (IRS) tax.
Swiss banks are managing one-quater to one-third of the world’s private wealth for international investment and UBS is a leading figure among them. However, under the lion’s skin, there lies a great deal of political burden. Confidentiality is the key factor for the existence of private banks, but when private banks grow to a certain scale, confidentiality no longer becomes a private matter.
G20 Seek Crackdown on Offshore Financial Centers
April 2nd 2009, the Group of Twenty (G20) Summit declared the termination of “unregulated capital markets”. Solving the problem of tax havens was one of the issues discussed at the summit. Facing the economic depression, the governments of 1st world countries are under increasing pressure to seek additional revenue.
For big countries, government fiscal revenue mainly comes from domestic taxation; for small countries, however, it mainly comes from foreign income. Contradictions between the demands of different interests accumulated and found an outlet at the G20 Summit. By avoiding malicious tax competition, and improving transparency of information, the tax competition of the future world is obviously that of a big-country domination pattern. Replacing information exchange agreements with bilateral tax agreements might be one of the negotiation topics between big and small countries.
Google’s Reasonable Tax Avoidance Through Irish Companies
On April 20th 2009 the British “Sunday Times” hired Richard Murphy, an accountant, to investigate Google’s business in the United Kingdom. The result showed that nearly 90% of Google’s UK revenue was channeled through Ireland — where corporation tax is levied at 12.5%, well below the UK’s 28% — giving them a tax-avoidance amount close to £100 million.
Since 2007, Google’s Irish subsidiary was wholly owned and controlled by one of its subsidiary companies registered in Bermuda, thus it had avoided a further €135 million in tax from Ireland. Under the circumstances of intensifying global taxation competition among different governments, reasonable tax avoidance is indeed a helpful measure for increasing enterprise competitiveness.
Foreign PEs Will Get Green Light to Set Up Wholly-Owned Subsidiaries in Shanghai
May 15th 2009, Fang Xinghai, director of Shanghai Financial Office, disclosed that overseas private equity investment management companies will soon be allowed to set up wholly-owned subsidiaries and joint ventures in Pudong and legally set RMB funds in mainland China.
Shanghai has never changed its self-orientation as an international financial center. This time foreign PEs get the green light to set up wholly-owned subsidiaries in the city, increasing the opportunity for Shanghai to attract international private equity funds.
Hong Kong: RMB Offshore Center
In June 2009 the PBC and the Hong Kong Monetary Authority signed a supplementary memorandum of cooperation for a cross-border trade RMB settlement pilot scheme between the Mainland and Hong Kong. Hong Kong enterprises will be allowed to settle commercial transactions in RMB with enterprises in Shanghai, Guangzhou, Shenzhen, Dongguan and Zhuhai. The industry generally believes that the implementation of the pilot scheme marks the beginning of Hong Kong’s role as an offshore RMB settlement center.
Hong Kong, as an international financial center and bridgehead for capital entering and exiting China, has long been a point of the concern for business people both at home and abroad. Ever since Hong Kong banks became the first to be allowed to open RMB deposit business, discussions never ceased about Hong Kong becoming an RMB offshore center. Although the prospect is not yet clear, perhaps starting from the implementation of the 2009 pilot scheme, Hong Kong is indeed one step nearer to the destination of being an “RMB offshore center”.
Tengzhong Heavy Industrial Machinery Intends to Buy Hummer Through Offshore Entity
On July 22nd 2009, when the little known Tengzhong Heavy Industrial Machinery announced its intention to purchase General Motors’ Hummer brand (the transaction amounts to US$150-200 million), the entire nation of China was shocked by the news. What makes the whole episode even more mysterious is that, as the deal seemed unlikely to get approval from the Ministry of Commerce and the NDRC, Tengzhong announced that they will take over Hummer through an offshore entity. A senior executive unwilling to give his name said, “Tengzhong is considering establishing an offshore investment vehicle to facilitate its purchase of Hummer.”
The executive said Tengzhong would become the major shareholder of the special purpose vehicle (SPV). Even leaving aside the question whether Tengzhong really has the ability to tame this “wild horse”, it would be very thought provoking just to ask oneself how could Tengzhong set up an offshore company, and how could it raise the US$200 million considering the circumstances that there is no approval from the Ministry of Commerce and Tengzhong could not get its domestic assets abroad?
German Bigwig’s Massive Tax Evasion Scandal in Liechtenstein
In September 2009 the German Government and the Government of Liechtenstein signed a cooperative agreement for financial information exchange in order to address the taxation dispute aroused early in 2008 by the former CEO of Deutsche Post, Klaus Zumwinkel, who committed tax evasion in Liechtenstein and secretly deposited €4 billion in Liechtenstein. Under this agreement, if German tax officials are able to provide relevant evidence, they can raise an explicit request to the Liechtenstein government in order to obtain a German citizens’ bank account information in Liechtenstein.
This is the origin of the surging storm of tax inspection in various countries in 2008. Controversies over the Bank Secrecy Act provoked animated discussions all over the world. After more than a year’s mediation by relevant agencies, different countries basically reached a cooperative agreement for bilateral information exchanges on the basis of “conditionally open” and the dispute over the Bank Secrecy Act came to an end for the time being.
Danone Vs. Wahaha Offshore Lawsuit Reached a Settlement
On September 28th 2009 the series of lawsuits between Danone and Wahaha, having lasted for 3 years, finally came to an end with the statement that “Danone has agreed to sell its 51% interest in the Danone-Wahaha Joint-Ventures to its Chinese partner (Wahaha).” Zong Qinghou, the Chinese merchant — who is still surrounded by rumors and criticism and who has fully proved his capabilities — had his long-time image as the banner bearer of Chinese national capital eclipsed after the fact was disclosed that he had been using offshore companies to control the JV.
The lawsuits experienced by Zong are mostly relating to his offshore companies, where he was able to win them all with a 39:0 score. The fact shows that the judges of these offshore companies’ jurisdictions, including the British Virgin Islands and Samoa, really strain after their clients’ benefit. At the same time, these victories have defended the dignity of the offshore jurisdictions. Of course, when KPMG where required to take over Wahaha’s domestic assets, the Chinese court declared this requirement illegal. This tells us we must not underestimate Zong’s influence in mainland China. In this post-economic crisis era, the majority of private enterprises have to rely on state-owned enterprises; however, most of them also own the offshore investor status, so that they are secretly stretching one foot into the international market. This is a fantastic landscape in offshore finance.
Shanghai and Tianjin will Build Offshore Finance Bridgeheads in China
October 26th 2009, Shanghai will follow suit of the Island of Guernsey, the world renowned offshore financial center, and implement a pilot offshore finance program at Yangshan Free Port Zone. October 28th 2009, the State Development and Reform Commission has approved Tianjin municipal’s “Special Program for Financial Innovation in Tianjin Binhai New Area’s Overall Reform Experiments”. Both Shanghai and Tianjin are striving to build offshore finance bridgeheads in China.
Not only is this in Shanghai and Tianjin, other cities such as Shenzhen, Fuzhou, Chongqing and Hong Kong are all hoping to ride the tide of the country’s financial reform and to stand at the forefront of China’s offshore financial business. Today in China, offshore finance is but a discussion on paper, but it seems that everybody is cherishing great expectations for the future of offshore finance in China.
Top-Ten Offshore News Review for 2008-09
Taxation Storm in China: New Regulations concerning Resident Enterprises and Special Tax Adjustment
January 8th 2009, the State Administration of Taxation (SAT) issued “Implementation Measures for Special Tax Adjustment Regulation (Interim)”, making detailed specifications on special tax adjustment issues such as enterprise transfer pricing, cost-sharing agreements, controlled foreign companies and thin capitalization, as well as general anti-tax evasion matters. In April, SAT issued a notice which clearly defined that Chinese controlled enterprises registered abroad should be determined as resident enterprises on the basis of their body of actual management.
Because of the economic downturn, tax collection is under severe pressure. Hence the Government introduced new regulations quite frequently this year in the hope of plugging the source of tax evasion on the policy level. In the long run, the tax law amendments would only tend to be more rigorous. The old maneuvers, for example, of simply setting up offshore companies, hiding tax sources, or transferring profit will get nowhere. The pursuit of more sensible tax planning is the global optimization, both in form and essence of our business.
Tax Fraud by American UBS Clients
February 19th 2009, UBS admitted guilt in having participated in “a fraudulent plan against the U.S. Government”. It handed over the account data of its 250 American clients who were suspected of tax evasion, and also paid a fine of 780 million Swiss francs, in an attempt to settle the series of taxation disputes starting from 2008 since a former UBS private banking sector manager had assisted a Russian real estate businessman to evade U.S. Internal Revenue Service (IRS) tax.
Swiss banks are managing one-quater to one-third of the world’s private wealth for international investment and UBS is a leading figure among them. However, under the lion’s skin, there lies a great deal of political burden. Confidentiality is the key factor for the existence of private banks, but when private banks grow to a certain scale, confidentiality no longer becomes a private matter.
G20 Seek Crackdown on Offshore Financial Centers
April 2nd 2009, the Group of Twenty (G20) Summit declared the termination of “unregulated capital markets”. Solving the problem of tax havens was one of the issues discussed at the summit. Facing the economic depression, the governments of 1st world countries are under increasing pressure to seek additional revenue.
For big countries, government fiscal revenue mainly comes from domestic taxation; for small countries, however, it mainly comes from foreign income. Contradictions between the demands of different interests accumulated and found an outlet at the G20 Summit. By avoiding malicious tax competition, and improving transparency of information, the tax competition of the future world is obviously that of a big-country domination pattern. Replacing information exchange agreements with bilateral tax agreements might be one of the negotiation topics between big and small countries.
Google’s Reasonable Tax Avoidance Through Irish Companies
On April 20th 2009 the British “Sunday Times” hired Richard Murphy, an accountant, to investigate Google’s business in the United Kingdom. The result showed that nearly 90% of Google’s UK revenue was channeled through Ireland — where corporation tax is levied at 12.5%, well below the UK’s 28% — giving them a tax-avoidance amount close to £100 million.
Since 2007, Google’s Irish subsidiary was wholly owned and controlled by one of its subsidiary companies registered in Bermuda, thus it had avoided a further €135 million in tax from Ireland. Under the circumstances of intensifying global taxation competition among different governments, reasonable tax avoidance is indeed a helpful measure for increasing enterprise competitiveness.
Foreign PEs Will Get Green Light to Set Up Wholly-Owned Subsidiaries in Shanghai
May 15th 2009, Fang Xinghai, director of Shanghai Financial Office, disclosed that overseas private equity investment management companies will soon be allowed to set up wholly-owned subsidiaries and joint ventures in Pudong and legally set RMB funds in mainland China.
Shanghai has never changed its self-orientation as an international financial center. This time foreign PEs get the green light to set up wholly-owned subsidiaries in the city, increasing the opportunity for Shanghai to attract international private equity funds.
Hong Kong: RMB Offshore Center
In June 2009 the PBC and the Hong Kong Monetary Authority signed a supplementary memorandum of cooperation for a cross-border trade RMB settlement pilot scheme between the Mainland and Hong Kong. Hong Kong enterprises will be allowed to settle commercial transactions in RMB with enterprises in Shanghai, Guangzhou, Shenzhen, Dongguan and Zhuhai. The industry generally believes that the implementation of the pilot scheme marks the beginning of Hong Kong’s role as an offshore RMB settlement center.
Hong Kong, as an international financial center and bridgehead for capital entering and exiting China, has long been a point of the concern for business people both at home and abroad. Ever since Hong Kong banks became the first to be allowed to open RMB deposit business, discussions never ceased about Hong Kong becoming an RMB offshore center. Although the prospect is not yet clear, perhaps starting from the implementation of the 2009 pilot scheme, Hong Kong is indeed one step nearer to the destination of being an “RMB offshore center”.
Tengzhong Heavy Industrial Machinery Intends to Buy Hummer Through Offshore Entity
On July 22nd 2009, when the little known Tengzhong Heavy Industrial Machinery announced its intention to purchase General Motors’ Hummer brand (the transaction amounts to US$150-200 million), the entire nation of China was shocked by the news. What makes the whole episode even more mysterious is that, as the deal seemed unlikely to get approval from the Ministry of Commerce and the NDRC, Tengzhong announced that they will take over Hummer through an offshore entity. A senior executive unwilling to give his name said, “Tengzhong is considering establishing an offshore investment vehicle to facilitate its purchase of Hummer.”
The executive said Tengzhong would become the major shareholder of the special purpose vehicle (SPV). Even leaving aside the question whether Tengzhong really has the ability to tame this “wild horse”, it would be very thought provoking just to ask oneself how could Tengzhong set up an offshore company, and how could it raise the US$200 million considering the circumstances that there is no approval from the Ministry of Commerce and Tengzhong could not get its domestic assets abroad?
German Bigwig’s Massive Tax Evasion Scandal in Liechtenstein
In September 2009 the German Government and the Government of Liechtenstein signed a cooperative agreement for financial information exchange in order to address the taxation dispute aroused early in 2008 by the former CEO of Deutsche Post, Klaus Zumwinkel, who committed tax evasion in Liechtenstein and secretly deposited €4 billion in Liechtenstein. Under this agreement, if German tax officials are able to provide relevant evidence, they can raise an explicit request to the Liechtenstein government in order to obtain a German citizens’ bank account information in Liechtenstein.
This is the origin of the surging storm of tax inspection in various countries in 2008. Controversies over the Bank Secrecy Act provoked animated discussions all over the world. After more than a year’s mediation by relevant agencies, different countries basically reached a cooperative agreement for bilateral information exchanges on the basis of “conditionally open” and the dispute over the Bank Secrecy Act came to an end for the time being.
Danone Vs. Wahaha Offshore Lawsuit Reached a Settlement
On September 28th 2009 the series of lawsuits between Danone and Wahaha, having lasted for 3 years, finally came to an end with the statement that “Danone has agreed to sell its 51% interest in the Danone-Wahaha Joint-Ventures to its Chinese partner (Wahaha).” Zong Qinghou, the Chinese merchant — who is still surrounded by rumors and criticism and who has fully proved his capabilities — had his long-time image as the banner bearer of Chinese national capital eclipsed after the fact was disclosed that he had been using offshore companies to control the JV.
The lawsuits experienced by Zong are mostly relating to his offshore companies, where he was able to win them all with a 39:0 score. The fact shows that the judges of these offshore companies’ jurisdictions, including the British Virgin Islands and Samoa, really strain after their clients’ benefit. At the same time, these victories have defended the dignity of the offshore jurisdictions. Of course, when KPMG where required to take over Wahaha’s domestic assets, the Chinese court declared this requirement illegal. This tells us we must not underestimate Zong’s influence in mainland China. In this post-economic crisis era, the majority of private enterprises have to rely on state-owned enterprises; however, most of them also own the offshore investor status, so that they are secretly stretching one foot into the international market. This is a fantastic landscape in offshore finance.
Shanghai and Tianjin will Build Offshore Finance Bridgeheads in China
October 26th 2009, Shanghai will follow suit of the Island of Guernsey, the world renowned offshore financial center, and implement a pilot offshore finance program at Yangshan Free Port Zone. October 28th 2009, the State Development and Reform Commission has approved Tianjin municipal’s “Special Program for Financial Innovation in Tianjin Binhai New Area’s Overall Reform Experiments”. Both Shanghai and Tianjin are striving to build offshore finance bridgeheads in China.
Not only is this in Shanghai and Tianjin, other cities such as Shenzhen, Fuzhou, Chongqing and Hong Kong are all hoping to ride the tide of the country’s financial reform and to stand at the forefront of China’s offshore financial business. Today in China, offshore finance is but a discussion on paper, but it seems that everybody is cherishing great expectations for the future of offshore finance in China.
