The primary tax risk that Chinese companies face when going global is the unfamiliar and complex tax system, collection, and administration of the target country. Failure to fully understand the target country’s tax regime and compliance requirements can lead to huge tax risks for businesses.
How to avoid tax risks and invest legally, today Elite Stage gives you our advice.
Businesses should understand the applicable tax regime, collection and administration requirements, and tax compliance of the destination country of the investment.In addition, attention should be paid to the preferential tax policy implemented by the government of the destination country to encourage and attract foreign investment.Even in the preparatory phase of foreign investments, it is crucial for companies to carry out thorough and careful tax due diligence. Therefore, during tax due diligence, companies should focus on the following:
determine evaluation considerations;
Identification of “red flags” in the business, accounting and control processes of the target company;
Overview of operational and balance sheet risks;
Identify spinoff considerations.
During the investment and operating phase of the business
Companies should pay attention to the commercial essence of the intermediate holding. From the point of view of tax risk, the existence of a foreign intermediate holding should not only be limited to obtaining tax incentives but should also have a reasonable commercial purpose, reducing the risk of being challenged by the tax authorities. The so-called “reasonable commercial purpose” and “commercial substance” are mainly reflected in the following aspects:Financial substance, ie the foreign holding has the financial autonomy to assume the related risks;Management content, ie the foreign company has employees or directors who can make decisions about the company’s assets and risks;
Operational substance, i.e. the foreign holding company has employees and directors involved in various business activities.
Ongoing review of tax management and internal control of foreign investments.This means that the financial risks of the location of the project must be constantly observed in the long term. Based on a full understanding of local tax laws and regulations, through advance planning, in-process control, and ex-post review of business activities, accurate and reasonable tax returns are made, and full utilization is made of tax guidelines to reduce the tax burden and control the related tax risks as far as possible.
The issue of cross-border income tax.Internationally, many countries levy taxes based on the source of income. Failure to pay personal income tax under the regulations of our country and the host country may result in tax collection penalties, late and non-compliance fines, and the risk of double taxation.
In order to enable Chinese companies to better manage and deal with global tax risks in the process of internationalization, companies can consider the following tax risk management measures:
Establish an organizational structure and management system for managing tax risk and establish full-time departments or staff. This will both improve tax compliance and better identify, assess, and address tax risks.
Use information management methods. In the process of business internationalization, there are many issues that need to be addressed by businesses and sometimes it is impossible to rely on manual management alone. If enterprises can use information-based management methods or technology platforms to achieve multi-port information collection, integrated information processing, and sharing, enterprises can manage business risks and global taxes more conveniently and efficiently.
Create country-specific tax management manuals. Companies can systematically sort out the tax system, tax issues, and treatment methods of my country and investment target countries, so that they know themselves and others how to handle international tax issues and tax risks.
Seek help from a professional tax advisory body. Many international professional tax advisory firms have strong international networks and rich industry experience and can provide companies with integrated professional services on a global scale. It is a wise decision to seek tax advice, guidance, and support from professional bodies when needed.
With over 10 years of experience, Elite Stag has always been focusing on providing companies with professional one-stop offshore corporate services, covering domestic and foreign company structure consulting, cross-border accounting and tax planning, special permits application, HR outsourcing and Visa services as well as preferential benefits application, etc.