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Chinese watchdogs team up to track forex flows in race to close tax loopholes

A rare deal sealed between two central government agencies signals Beijing’s readiness to pursue taxes beyond its borders, analysts say.

The State Administration of Foreign Exchange and the State Administration of Taxation agreed last week to share information on a regular basis to monitor “tax sources overseas” and payments in foreign currencies.

The specific agreement ­between two government agencies is unusual because the two regulators, both of which come under the State Council, already have ­internal communications channels.

Pan Gongsheng, head of the forex regulator, and tax bureau chief Wang Jun were both on hand for the signing of the “memorandum on information sharing and joint regulation”, according to a statement on SAFE’s website.

The memorandum was “significant” in the government’s commitment to crack down on irregularities such as “cheating on export tax refunds” and “illegally transferring foreign exchange funds abroad”, the statement said.

One of the main targets of the agreement is abuse of tax refunds for exports of services.

The authorities introduced the refunds for those exporters to encourage businesses to move up the value chain away from cheap manufacturing, but the tax breaks were open to abuse by beneficiaries on the mainland.

Kevin Zhou, a tax partner at EY in Shanghai, said part of the problem for the authorities was that verifying exports of services was harder than for tangible products.

But the agreement could go some way to overcoming that ­difficulty.

“Monitoring foreign exchange flows can help substantiate the nature of the services as well as the beneficial owner,” Zhou said.

China’s tax authorities to begin financial data collection on foreign residents from January

Andrew Choy, international tax leader for greater China at EY, said Beijing had increased expertise among tax officials with more training on cross-border tax issues, and that development trend was expected to continue for at least two to three years.

Choy said the next priority would be to put the new rules into ­effect.

Earlier this year, China tightened tax reporting requirements on multinationals to help close massive global loopholes, with companies now required to file extensive reports on internal pricing and costs between overseas operations.

In addition, tax authorities released draft rules last month in preparation for a common international reporting mechanism that would allow the agencies to share financial information about foreign residents in China. Effective from next year, the system also would enable Beijing to track the incomes and assets of wealthy Chinese overseas through the reporting and sharing of information between more than 100 tax jurisdictions around the world.