Income Tax Evasion in China: Maersk and Accor Pay No Taxes in China—Why Should You?

Or Subtitle: How To Work For A Chinese Partner Who is Dishonest and Cheats Her Big Clients!

Following our discussion on corruption in a recent blog entry, the topic for today is Income Tax Evasion in China. Specifically, how can a foreign company pay no, or minimal tax, while doing business in China, and not get caught for it?

Well, fortunately, I have some insight from my firm, which is staffed with some of the top PRC tax and business attorneys. The irony is that tax law, like many laws in China, is very clear. The laws are on the internet, in English, so everyone knows what they are. The key is enforcement, since the government here is stretched, and especially with regard to taxes has no simple way to enforce the law to ensure it gets paid.

My clients ask tax related questions to me repeatedly, but my clearer understand of how to deal with the issue followed an email communication I had with Wang Lihua. I was trying to find out when I would be paid, after working at Zhong Lun for 20 months during which time I was taxed at a consistent 12.5% rate. To my surprise, Wang Lihu, who is the lead counsel for all work in China by huge multinationals including Maersk Shipping and Accor Hotels, explained very concisely that businesses in China have a lot of flexibility in paying taxes here, and in fact can choose to offset taxes and salary payments as a method of avoiding taxes altogether. Here is a copy of that email exchange:

From wanglihua <wanglihua@zhonglun.com> hide details Feb 6
To Jeff Brauer <jeffbrauer@gmail.com>
CC zhangxuebing@zhonglun.com, sxu <sxu@zhonglun.com>
Date Feb 6, 2007 2:41 PM
Subject 答复: stolen computers, personal belongings, salary

Dear Jeff,
I refer to your e-mail below to Zhang Xuebing and hereby reply to you on behalf of Xuebing:
1.  We are very surprised and disappointed with your alleged claim that we have stolen your personal belongs. We would like to inform you that your maid has already taken back on your behalf all your personal belongs from us, and your alleged claim has damaged our reputation.2. You  should not diminish or jeopardize Zhong Lun’s reputation and image in any event or occasion.3. Your personal income tax does not seem to be fully settled.  We reserve the right to report to the US Embassy on your personal income issue.Regards,
Wang Li Hua

发件人: Jeff Brauer [mailto:jeffbrauer@gmail.com]
发送时间: 2007年2月6日 13:39
收件人: zhangxuebing@zhonglun.com; sxu; wanglihua@zhonglun.com
主题: stolen computers, personal belongings, salary

Dear Zhang Xuebing:

I have met with the US Embassy in Beijing today to report that Zhong
Lun has stolen my personal belongings including my clothings and
personal computers, and that it has not paid me my salaries despite
contracts with you. I have asked them to help me resolve this by
working with the US State Department.

Jeff Brauer

If there’s any doubt about Wang Lihua’s expertise with this, note that she is a top-tier partner at Zhong Lun (that is why her photo is at the top of the firm’s website), and that she sits near other partners who have been discussed previously in chinalawyerblog.com including Shirley Xu (Microsoft) and Zhang Decai (Fuji Film, Dinner with Judge Video/Bribery).

So, to summarize, following my communication with Wang Li Hua on this issue, I now advise my clients here that it is in fact possible—in fact very easy—to avoid paying taxes in China, but preparation is the key. It is a two step process. First, hire an experienced accountant firm. Second, hire a capable, experienced tax lawyer, and let the two communicate early on—before taxes are due, so the government is not alerted! They need to discuss both strategies for a) interpreting taw laws to the benefit of your company, and b) defending against government inquiries, however unlikely, that your firm did not pay taxes. I would again emphasize that it will help to consult with a top partner like Wang Lihua to understand the intricacies of the offset between salary and tax payments, but it clearly can be done. Let’s face it: if Maersk, Accor and even Zhong Lun Law Firm don’t have to pay taxes, why should you?