Global pact to help China fight tax evasion

Signing a global tax convention will help China with international tax supervision, but the nation's tax system also needs revision to meet global standards, an expert said.

On Aug 27, China signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters in an effort to fight tax evasion.

The convention enables China to automatically or quickly exchange information with other member countries and conduct joint tax investigations both within and outside China.

"The convention covers more tax categories and more mutual-assistance mechanisms than the existing treaties and information exchange agreements that China has entered into," said Abe Zhao, tax partner with KPMG China.

"This ready availability of tax information from another country endangers tax arrangements that depend on their lack of transparency to the Chinese tax authorities."

With membership in the convention, China obtains a new tool to identify and challenge a range of international tax administration issues with a global view, Zhao said. In addition, the convention allows China to enlist foreign help to recover outstanding taxes and administrative fines, he said.

In a nutshell, the Chinese tax authorities now can leverage more domestic and overseas resources to fight tax evasion and adhere to higher international standards of administration and cooperation in the tax field.

"Chinese tax authorities may set up certain reservations on obligations under the convention considering its current regulatory or capacity constraint," Zhao said, adding that China will need to ratify the convention internally to make it legally binding.

Meanwhile, Chinese tax authorities will establish detailed operating procedures on exchanging tax information with other countries and integrate them with China's tax auditing process.

Finally, China is expected to revise domestic regulations to remove any conflict with the convention and realign government resources to better fulfill its obligations so that it can enjoy more reciprocal rights under the convention.