China is cracking down on tax evasion. Officials are looking into international firms operating in China, that may be exploiting loopholes in the tax law. Primarily, they will be looking into businesses that liberally use offshore accounts to escape paying some of their taxes. Businesses send profits and money to shell businesses in Hong Kong, which in turn route funds towards tax shelters, usually the Caiman Islands.
China has focused these efforts primarily on international corporations, rather than national ones, although officials said that this will change in the future, and focus their efforts on domestic businesses.
The increased scrutiny on tax evasion and enforcement of tax laws may have negative repercussions for Chinas economy, but this is likely to happen only after focus has been shifted to domestic businesses. This is largely due to the fact that China wants to protect its own businesses that have begun to invest and develop internationally.
Some reasoning behind the recent crackdowns, besides China desiring the income that is legally its own, is to assert control over Hong Kong. The student protests of last year, combined with the tax evasion operations in the city, have shifted government focus towards asserting dominance over the city, which only recently transitioned into Chinas control.
The recent decrease by the Chinese government have some large firms concerned, as the legal system in China is difficult to navigate. Businesses are concerned that improperly given fines or seizures by the Chinese government will be nearly impossible to rectify in the Court system, and will be lost to the companies that deserve them.
Source: http://www.nytimes.com/2015/02/05/business/international/china-to-enforce-tax-collection-from-multinational-companies.html?ref=asia&_r=1
See the various posts on corruption. To what extent is tax evasion a separate issue? Is that a good way to root out corruption?
Of course this is an issue in the US, though it’s not “evasion” because corporations have succeeded in getting Congress to make it legal. So for us it’s “avoidance”.
I believe that tax evasion is a separate issue in that instead of acting against written law by way of corruption, evasion uses legal loopholes in established law to cheat the government out of money that ideally should be granted to the government. I do not believe that fixing tax evasion will work towards ending corruption. I do believe that tightening Chinese tax laws and cracking down on tax evasion will send a strong message about the intentions of the Chinese government to crack down on corruption in the future. China is sending a message about its own stability and legitimacy. If their efforts now are successful, expect further crackdowns on corruption in the future.
Note the political convenience to the top leaders of pursuing corruption when corruption is pervasive: everyone can be made to toe the leadership’s line on other issues, lest they be subject to investigation.