China joins global effort to combat tax evasion

China on Tuesday joined an international effort to fight tax avoidance and evasion by signing a multilateral tax agreement to share tax and financial information.

The agreement, known as the Convention on Mutual Administrative Assistance in Tax Matters, is the first multilateral tax instrument China has signed.

The participation of Beijing, the last Group of 20 member to sign the agreement, was viewed as a timely and significant step as it means all G20 countries are now moving toward the implementation of automatic tax information exchanges as a new global standard, which is also a main priority of the upcoming G20 summit in St Petersburg, Russia, next week.

Wang Jun, director of the State Administration of Taxation, said at a news briefing in Paris that China's participation has "significant implications" as it will help enhance the country's international tax cooperation while it experiences major economic and structural reforms.

"It also reflects further integration and opening-up of China's taxation system to the international community," he said.

The convention was initially proposed by the Organization for Economic Cooperation and Development and the Council of Europe in 1988. In 2010, it was opened to all countries. Since then, 56 countries have joined.

OECD Secretary-General Angel Gurria said that China's decision to sign the agreement is a timely and important step as it reinforces the international will and collaboration in tax information exchanges.

"We hope that the ratification of the convention will take place soon in China so that we can really move forward," he said.

Tax experts said that China's joining the convention is part of a global trend moving from bilateral to multilateral cooperation to fight offshore tax evasion.

By joining the convention, Chinese tax authorities will be able to gain access to the spontaneous exchange of information, simultaneous tax examinations and assistance in tax collection.

"It is a very important sign that the Chinese tax authorities are getting more comfortable with the tax standards practiced in Europe and the US. And the convention can only work when all major economic powers join," said Erik Stroeve, a tax partner at audit and accounting firm Mazars.

China will benefit from the convention as it may lead to tax collections that were previously not within the reach of the Chinese tax authorities, Stroeve said.

It will also force multinational corporations in China to be more prudent and serious about their tax structures, and it will make it difficult for foreign companies to hide or shift certain profits elsewhere to avoid taxes, he added.

China has stepped up the effort at home to fight against illegal capital outflow, which is closely linked with cross-border tax avoidance and evasion.

According to the US research and advocacy group Global Financial Integrity, China saw a $3.79 trillion illegal capital outflow between 2000 and 2011. Of the roughly $2.83 trillion that flowed illicitly out of China from 2005-11, a total of $595.8 billion wound up as cash deposits or financial assets - such as stocks, bonds, mutual funds, and derivatives - in tax havens, according to the research.

"China's accession to the convention would increase the efficiency of Chinese tax authorities in combating potential tax avoidance and evasion by foreigners and foreign companies," said Steven Zhang, managing director at Fund Tax Services LLC in New York.

Experts said that joining the convention will also bring new challenges for China as its national taxation system still needs improvement and the country lacks practical experience in international tax cooperation.

"One potential challenge for China is how to acquire valuable tax information from other countries and how to assess the information and turn it into something valuable for tax authorities," Stroveve at Mazars said.