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Small and medium-sized enterprises “going global”: using bilateral agreements to reduce tax burdens



Last year, a department organized a survey in an African country. More than 60% of the situations reported by local Chinese-funded enterprises were tax issues, and most of these enterprises were small and mediu…

Last year, a department organized a survey in an African country. More than 60% of the situations reported by local Chinese-funded enterprises were tax issues, and most of these enterprises were small and medium-sized enterprises. Many small and medium-sized enterprises do not know that tax treaties exist and are not good at using tax treaties as a legal weapon to protect themselves.
On the 21st, Wang Wenqin, deputy director of the International Taxation Department of the State Administration of Taxation, expressed the above views in an online interview titled “Tax Agreements Help Chinese Enterprises Go Global” hosted by China Government Network.
Small and medium-sized enterprises face greater tax risks when “going global”.
The so-called tax agreement is an agreement between two countries on how to avoid double taxation on corporate income or property and how to prevent tax evasion. If the two countries have signed a tax treaty, companies investing there will be taxed in accordance with the tax treaty between the two countries, rather than local domestic tax laws. At present, China has signed double taxation avoidance agreements with 99 countries, second only to the United Kingdom.
Tax treaties bring many benefits to companies that “go global”. For example, eliminate double taxation and reduce the overall tax cost of “going global” enterprises. It can provide tax certainty for “going global” enterprises and reduce the tax risks of cross-border operations.
In addition, tax treaties can reduce the tax burden of “going global” enterprises in host countries and improve competitiveness. Generally speaking, tax treaty tax rates are often lower than the domestic law tax rates of the host country. Taking Russia as an example, its domestic law’s standard withholding tax rate for interest and royalties is 20%. According to the latest agreement signed by China, the withholding tax rate for interest is 0%, and the withholding tax rate for royalties is 0%. The tax rate is 6%.
In addition, when enterprises “go global”, they will inevitably encounter tax disputes with the tax authorities of host countries. Tax disputes can be resolved by using tax treaties. Wang Wenqin gave the example of a domestic company leasing equipment to a subsidiary (overseas), which involves rental fees. The host country did not implement the tax agreement between the two countries, but levied taxes in accordance with domestic laws. After the domestic company reported it to the relevant departments, they negotiated with the country. The other country agreed to implement the tax rate and promised not to engage in “levy first, then retreat” in accordance with domestic laws. This not only solves the problem of overpaying taxes of more than 20 million US dollars by enterprises, but also solves the problem that all Chinese-funded enterprises face the problem of collecting taxes first and then withdrawing taxes later.
Wen Limin, chief accountant of Dongfang Electric Group Co., Ltd. who participated in the online interview, said that the role of tax treaties is obvious, which is reflected in low tax burdens, avoiding double taxation and bringing tax policy certainty.
However, Wang Wenqin said that large enterprises like Dongfang Electric are better at using tax treaties, but small and medium-sized enterprises are weaker.
Wang Wenqin said that large companies have professionals and money to hire intermediaries to understand tax treaties and enjoy the treaty benefits. If there is a dispute, the agreement will be used to protect one’s own rights and interests. “So, more than 90% of the cases that apply for mutual agreement with us are large enterprises, and there are very few small and medium-sized enterprises. In the past two years, we have done some work in promoting tax treaties, and the awareness of rights protection among small and medium-sized enterprises is slowly awakening.”
“Our advice to enterprises, especially small and medium-sized enterprises, is that when investing and operating overseas, they must pay attention to preventing and controlling tax risks. They must not only understand the tax laws of the host country and consciously abide by the laws of the host country, but also understand tax treaties and fully enjoy the benefits of the treaties. Use tax treaties to protect your own rights and interests.” Wang Wenqin said.

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