China tax lawyersThe tax man cometh and taketh away. ALWAYS.

There has been a lot of press lately of how China is reducing business taxes to stimulate its declining economy. This is all well and good but when it comes to taxes — especially China taxes — there ain’t no such thing as a free lunch.

Yes, China is reducing various VAT rates and mandatory employer pension contributions but it also is moving ever apace in tightening up its tax enforcement capabilities and these enforcement changes will and already has impacted foreign businesses more than the tax reductions. As our regular readers know, we have for at least a decade written about how China has consistently and inexorably tightened its laws and tightened its law enforcement, especially as against foreign companies. See e.g., Doing Business in China Without a WFOE: Will the Defendant Please Rise.

Official Chinese publications on its tax decreases talk of how tax collections will actually rise, due in part to changes in law to force individuals and businesses onto China’s tax “grid” and due to stepped up tax enforcement. For an example of legal changes that will bring “hidden” businesses to light, check out China’s Daigou Shopping Model: This is the End, My Friend…. The Bank of China recently issued a notice requiring China’s banks to report all transactions exceeding certain amounts with the plan for some of the accounts involved in those transactions to be turned over to the tax authorities for further investigation. Foreign companies, I’m talking to you. China has also enacted various laws to name and shame and penalize individuals connected with businesses that fail to fully comply with China’s increasingly stringent tax laws.

Foreign businesses operating in China can and must protect themselves by doing the following (somewhat obvious) things:

  1. Determine whether they are or are not doing business in China. If you have anyone on the ground in China on behalf of your company the odds are good that you are doing business there and you owe all sorts of taxes for that. See againDoing Business in China Without a WFOE: Will the Defendant Please Rise.
  2. Hire a good accounting firm and a good bookkeeper to make sure you are doing everything right on your China taxes.
  3. Don’t listen to anyone but your own accountants and bookkeepers and lawyers about what you should be doing regarding your China taxes.
  4. Just because you know of others who are not paying certain taxes does not in any way justify your not paying those taxes.
  5. Be wary of anyone — either inside or outside your company — who in any way minimizes the need to pay China taxes.

At the end of 2018, in How’s Your China WFOE? Please Check, we wrote of how “at the end of every year, our law firm always gets a slew of emails and phone calls from foreigners in big trouble in China.” The post then talked of how “in past years the trouble has mostly involved unpaid taxes, usually with the following sort of scenario:

Foreigner (disproportionately Northern European) calls to say that they are in their home country for the holidays and they have learned that the “tax man” has come by and is extremely unhappy about the company not having reported all of its China earnings. The person wants to know whether it is safe for him (it has 100% of the time been a male) to return to China. Three more minutes of talking reveals that this company has not even come close to paying its China taxes and the person on the other end of the line “justifies” this by saying his Chinese accountant told him that “nobody pays these taxes.” I very dispassionately tell this person that I don’t know what percentage of foreign companies pay their China taxes, but that the China attorneys at my firm advice all our clients to pay all their taxes and that is in large part because China LOVES going after foreign companies that don’t pay all their taxes AND has gotten really good at catching those that don’t. I then tell him that he absolutely should not go back to China unless and until his company has cleared up all back taxes, with interest and with penalties. I got only one such phone call (so far) this year.

Though we are not even three months into 2019, it feels like we have gotten more tax trouble calls this year than all of 2018 combined. These are calls involving employer taxes, company and personal income taxes, and custom duties (especially). And in nearly every instance the problem has stemmed from a foreign company (so far just North American and European companies) not paying taxes based on some misguided belief that no taxes were owed. Do not choose your accountant based on an “ability” to save you money. Choose an accountant who provides you with the real life advice you need.

Tomorrow I am going to write about flat out bad China WFOE formation companies and how those same companies show up again when it comes to providing flat out bad China tax and accounting advice and how those two things are so intimately tied together.

In the meantime, be careful out there.

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Dan Harris

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.