China is considering plans to strengthen tax reporting requirements on foreigners working in the country to help close a massive global loophole.
Under the proposed plan, foreign nationals will need to file extensive reports on internal pricing and costs between overseas and headquarters, the South China Morning Post reported on Wednesday citing insider sources.
The proposed requirements are part of China's contribution to a global effort to stamp out the rampant practice of altering the price put on labor, services, or intangible asset transfers within global operations that allow multinational firms to divert profits to low-tax countries, the report said.
"The focus has been shifting from tangible assets to intangible assets," said Paul Tang, a tax partner with PricewaterhouseCoopers, adding that the proposal also targeted overseas payments and royalties.
According to the Organization for Economic Cooperation and Development (OECD), such profit-shifting practices have led to $100 billion to $240 billion in lost tax revenue annually, which is equivalent to up to 10 percent of corporate income tax revenue worldwide.
China's State Administration of Taxation issued a consultation draft on the proposal at the end of 2015, which stated that multinationals would have to disclose affiliated businesses and how intangible assets, labor, and internal cost transfers were made, an anonymous source told the Post.
"[Internal transfer pricing] is a gray area to utilize loopholes in tax rules between different countries, but now the governments [of those countries] are acting to close the hole," the source said.
The OECD has been urging countries to set universal reporting standards to close the loophole since 2012.
The source said the proposed plan is an attempt to bring China's laws in line with OECD standards.
According to Ernst & Young and PricewaterhouseCoopers, the new rules are expected to come into effect retrospectively from Jan. 1, 2016.
The draft has also caused concern among industry observers due to the scope and detail of the documents multinational companies, including those from China, would have to submit to China's tax authorities.
"It would lower the incentive for multinationals to invest in China," the source told the Post.
Jeff Yuan, a transfer pricing services expert with PricewaterhouseCoopers, said that foreign workers face similar regulations elsewhere.
"The extra documentation work is not only happening on the mainland but in major economies as well," he said. "It is the first time that major economies have taken joint action to address the tax avoidance issue amid growing globalization."
Travis Qiu, a tax partner with Ernst & Young, said that Chinese companies eyeing business offshore could find the requirements troublesome due to their lack of experience in the area.
On Wednesday, Vice Premier Zhang Gaoli said in a taxation report that China is pushing for increased global cooperation to clamp down on tax avoidance and evasion practices.