Tax Holes in China: Beware of the Gray Area

Taxes are a dominant figure when one does trading: taxes act as a direct trade inhibitor and causes friction regardless of industry. In China, taxes rates both vary by province and are interpreted differently in each jurisdiction. Needless to say, too much information exists and can either be ignored or overlooked (or both) when starting a business. Such tax compliance can actually benefit you, but often it may not.

For example, many foreigners buy from China (in fact, China is the largest exporter so this is an understatement). However, both export and importation taxes exists; the material simply isn’t in English. Eventually though it could become a problem which merits more compliance penalties than repayment of past taxes. One problem foreigners are often “caught up” in is payment of foreigners in China on the hush. This means, paying them directly to foreign bank accounts while they operate in China.

Such a method works while working on a small scale, but will lead to larger penalties later. Having a permanent establishment in China-legally-is extremely tricky, but governments do not care. If you are hiring in the gray area, your firm will be subject to double taxation rules (i.e. you pay both your government and China). Such a problem is particularly risky, because you face both legal repercussions for non-compliance with business registration laws and tax laws.

Beware of the gray area.