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Over two centuries ago, Scottish philosopher Adam Smith suggested that simplicity is one of the pillars of an effective tax system. Considering that 98% of businesses in most countries are small or medium-sized and easily alienated by overly complex systems, his conclusions are all the more important today.

This article was first published in the May 2012 edition of Accounting and Business magazine.

Discussing options to streamline and simplify tax systems in China, and the tax relationships between China and its increasing number of trade and investment partners, was the focus of the ACCA International Tax Summit on 22 March, held at the Shanghai National Accounting Institute (SNAI).

Speaking at the opening of the afternoon summit, ACCA chief executive Helen Brand noted that tax is a priority for the organisation, which recently issued 12 new tenets of taxation, discussing priorities for efficient and fair systems.

‘Companies everywhere are faced with a series of complex problems in relation to international taxation,’ said Brand. ‘As a result, tax is now a central issue for them to deal with. China is no exception.Tax always tops the policy and political agenda. Because of this, it also increasingly tops the business agenda, too. There can also be no denying that tax is a multinational issue.’

Among the most important of the ACCA’s tenets of tax are openness, transparency, simplification, certainty and efficiency. All are elements that China is working hard to build into its tax system. Policymakers need to instil trust in the tax system and reduce duplication across borders.

‘Certainly there will be pressure on governments to make sure they are doing the right thing by collecting the right tax at the right time, whether it is from big business or from an individual tax payer or small business,’ said Brand.

Keep talking

Taxation is a significant issue for both businesses and governments; the former want to minimise tax exposure while not falling foul of the law, while the latter want to maximise income while maintaining a competitive environment. The financial crisis that started in the US in 2008 highlighted some of these challenges, said Dr Jeffrey Owens, former director of the Centre for Tax Policy and Administration at the OECD.

Although China is not a member, the country still works with the OECD in a number of areas including taxation. ‘What do we do? We talk. And that is important in the tax area because when you talk between governments, and when you talk between governments and business, that’s the way that you avoid issues becoming problems,’ said Owens. ‘In today’s environment it is very easy for tax to become a major problem.’

Tax should not be a barrier to world trade, said Owens; rather, it should enable it. At the same time, a tax system can reduce unfairness and inequality in society.

‘A tax system must be perceived as being fair,’ Owens continued. ‘We must try to minimise tax disputes between countries.’

The financial crisis and the global response to it have created new challenges for China. The first is the need to build a tax system that is fair, efficient and environmentally friendly. Another is to ensure that the country’s tax system reflects its position in the world economy. A third challenge is the need for China to be increasingly involved in the debate over tax transparency.

Transparency is vital

This debate over transparency affects both governments and business. Governments have to provide clear rules that business can follow. Business, on the other hand, is under increased pressure to be more transparent and more responsible. The idea that a corporation can take advantage of offshore structures and loopholes is increasingly less acceptable, both from a regulatory and a public relations point of view.

‘By closing off these loopholes you make the tax system more fair,’ said Owens. ‘Multinationals must now comply not just with the letter of the law, but with the spirit of the law.’

Over the last few years China has been constantly restructuring its tax system away from a turnover system to avoid double taxation, while giving the service sector a boost, said Huang Suhua, director of global cooperation and compliance at the State Administration of Taxation’s International Taxation Department. ‘China has made substantial progress in the programme of international taxation,’ he said.

China has also reformed its resource tax and is now working on a value-added tax. Foreign and domestic companies have been put on an even footing, while a tax law adopted in 2008 provides incentives for development and innovation.

Taxation reform is part of a broader economic shift in China, as the country works to move the basis of economic growth from exports to domestic consumption. One way to do this is to reform the tax system to eliminate multiple taxation and unlock purchasing power. At the same time, relief to individual taxpayers can encourage domestic consumption while incentives for corporations can encourage high-value economic activities, said Huang. ‘In the era of economic globalisation, collaboration is that much more important,’ he added.

The country is increasingly involved in the international tax arena by extending its network of tax treaties and cooperating with tax authorities around the world. China already has 98 double taxation agreements and eight tax information exchange agreements. 

‘Information is one way to resolve disputes in the international tax arena,’ noted Fergus Wong, director of knowledge management for tax services at PwC Hong Kong and co-chair of the ACCA Hong Kong Tax Subcommittee. Wong chaired a summit panel that included Owens, Huang, Daniel Leung, finance director of Dupont China, and Yan Yan, a professor at the SNAI.

A simplified tax system is good news for business, Leung said. ‘All in all, I think we have seen a much improved legal environment on taxation and I think that will continue,’ he said.

Even though foreign businesses no longer enjoy tax breaks granted to them when China first opened up, transparency and incentives to innovate can balance the scales.

The summit in Shanghai coincided with Brand’s visit to China in March, during which she met with policymakers and industry executives. She also announced the signing of a memorandum of understanding with the SNAI – one of three top-level accountancy institutes in China – to strengthen cooperation on distance education and training.

01

 ACCA chief executive Helen Brand highlights why tax is a priority for the organisation

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Dr Jeffrey Owens, former director of the Centre for Tax Policy and Administration at the OECD, describes the importance of international communication

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Huang Suhua of the State Administration of Taxation

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Panellists discuss possible changes to China’s tax system

Alfred Romann, journalist

 

 

Last updated: 8 Apr 2014