The Tax Man is Coming.. and He Wants More!

Wednesday, January 24, 2007 9:26

The Shanghai Daily reported today China to Reduce Tax Gaps Between Companies.

This is an issue, along with the removal of the VAT, that others have been reporting for some time, and so it comes at no surprise that it would come at the same time as the passage of new M&A rules, labor laws (PDF) , investment laws, and the like.

Now, before the media breaks another anti-foreign investment story, and how these new taxes are just a way to crush foreign competition, one only needs to look at the chart below to see that Hong Kong is the primary source for funds. It invests six times the amount of funds than the United states, and invests more money than the three following cities.

Chinese Foreign investment

No doubt, a percentage of this money is coming from foreign companies who have roots in HK, but the large majority of this money is coming from Mainland companies who roundtrip the money for tax breaks. It is what China calls an open secret, and as such, the real damage will not be to the foreign investors from the U.S….. it will be to the large local firms who have been reimporting their money on a regular basis to gain access to “foreign” tax breaks.

Expect to see more on this in the coming months..

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2 Responses to “The Tax Man is Coming.. and He Wants More!”

  1. Sergey says:

    January 26th, 2007 at 12:21 am

    Yes, but what are the percentages? Plus what do you think is the point of keeping an offshore account? It’s to provide a safe regulatory environment for investors to put & take their money out – not for a Chinese company to run “rountrips” without a reason.

  2. rbrubaker says:

    January 26th, 2007 at 2:41 am

    Sergey, Interesting questions.. and ones that I cannot fully answer.

    with respect to the percentages, there are none available… at least not publically. My comments are based on conversations with lawyers, accountants, and bankers whom work to structure deals offshore.

    As for why would one structure offshore, there are two things in my opinion that make round tripping money and offshore structures attractive:

    1) Tax strategy: Taxes in HK are significantly cheaper and as Foreign invested companies can often receive a 3 eyar tax holiday (therefore, it is a tax strategy as the roundtripped money will be classified as foreign invested).

    2) Exit Strategy: Another important reason strategically as to why copmanies would do this is that companies structured in HK are much easier to exit from. Share transfers are much easier in HK, and so for many companies who may be looking to IPO or find a foreign investor.

    3) Washing strategy: No doubt some (again, I have no percentages here) of this money is being taken out, cleaned, and then brought back into the country by companies who are looking to hide profits, legally or illegally gained.

    Have a good weekend