Exclusive Interview on Going Global | Under the Strong Supervision of Cross-Border Compliance, How Can Global Enterprises Build the Optimal Fiscal and Tax System?

After the National Day holiday, many people who have overseas businesses and incomes and are engaged in cross - border financial affairs may have successively received calls or notices from tax authorities. This is because the fifth batch exchange under the OECD Common Reporting Standard (CRS) was recently completed.

Under the fixed cross - border tax information exchange mechanism of the OECD Common Reporting Standard (CRS), 157 countries participated in this fifth batch exchange. Relying on this mechanism, the Chinese tax authorities have obtained a large amount of information on overseas financial accounts, forming a data closed - loop with the "one - person" file of the Golden Tax Project Phase IV. This enables more comprehensive and in - depth supervision of enterprises' cross - border businesses and even individuals' cross - border financial flows.

The more transparent and effective global fiscal and tax supervision not only invalidates many previous tax - avoidance and tax - evasion methods, but also many long - existing but actually non - compliant fiscal and tax structure designs may face accountability and penalties, forcing enterprises and individuals to change their thinking, shifting from passive "geographical cash - out" to active "compliance first".

However, when communicating with many enterprises intending to go global, we found that enterprises still have many misunderstandings and myths about cross - border tax compliance. Therefore, we specially invited Wang Xueyin, a partner of Hangzhou of U&I GROUP, a professional fiscal and tax service institution, to conduct a professional interpretation around the three common misunderstandings of enterprises.

1. The fundamental purpose of tax compliance design is to reasonably reduce the tax burden cost

Misunderstanding: Tax compliance will increase costs, and doing structure design is just to prevent accountability

Wang Xueyin: Before the implementation of CRS, it was actually difficult for tax authorities to detect enterprises' overseas financial activities, and non - compliant behaviors were hard to be supervised. For example, ten years ago, if an enterprise registered a company in Hong Kong and then invested in the Chinese mainland, it could be regarded as FDI (Foreign Direct Investment), but in fact, it was the enterprise's own money.

However, such operations must be abandoned now because CRS can penetrate the structure design of Hong Kong companies to find the actual controllers behind. If the actual controllers are Chinese residents or enterprises, they must pay taxes normally according to the tax regulations of the Chinese mainland. It should be noted that tax deductions can be made between Hong Kong and the Chinese mainland. For example, according to the Chinese tax system, an enterprise needs to pay a 20% corporate income tax. If it has already paid 16.5% in Hong Kong, it only needs to make up the remaining 3.5% on the Chinese mainland.

So now when we design structures for our clients, we also include the part of identity planning. For example, if you have an enterprise overseas and want to invest back in the Chinese mainland in the form of FDI in the future, you must ensure that you have a foreign nationality or permanent residency in Hong Kong.

Many enterprises mistakenly think that this will increase tax costs. In fact, structure design is not only to prevent post - event accountability or fines, but to comprehensively consider the tax system differences in different regions around the world from the very beginning, design the most cost - effective structure, and thus legally and compliantly reduce the tax burden. Don't wait until being detected by the tax authorities and then pay a greater price to make up for the loopholes. Especially large - scale enterprises will definitely be noticed by regulatory agencies and cannot pretend not to see these risks.

2. The tax structure needs to be continuously and specifically adjusted according to the business stage and the market

Misunderstanding: Building a tax system can be a one - time effort

Wang Xueyin: Tax compliance is not something that can be designed at the beginning and then followed all the time. It is a matter of "rowing while approaching the shore".

How to understand this? Firstly, the development status of an enterprise is constantly changing. For example, one of our clients is a glove supplier for Walmart. Initially, it was just a small - scale enterprise with an annual revenue of less than 5 million yuan. However, during the COVID - 19 pandemic, the order volume suddenly soared, and the production scale could not keep up. So it had to temporarily purchase goods from other production enterprises. In this special situation, in order to quickly seize short - term business opportunities, the enterprise sometimes directly used WeChat transfers when trading with suppliers, which actually belongs to private account collection behavior.

The fundamental goal of an enterprise's development is ultimately to achieve the wealth accumulation of individuals and families. If the money earned is non - compliant, it will be like a time bomb, and enterprise operators cannot feel at ease. So, compliance cannot be considered only when the enterprise has grown in scale. This is why we are willing to serve some small - scale enterprises, accompany them from the very beginning of their business, and promptly remind them of the existing compliance risks and improve the compliance procedures in a timely manner.

For example, in the process of going global, the first step for an enterprise is to build a compliant structure design. As the business scale increases, continuously optimize the structure to further reduce the tax burden cost. Finally, with the help of various global financial tools, improve the compliant family wealth accumulation structure.

On the other hand, the tax systems of each country and region are different, which is a completely unfamiliar cognitive gap for most enterprises. Most of the questions that enterprises come to us for consultation mainly focus on understanding various data of the local market to evaluate potential benefits and costs. So we will advise enterprises that the first thing is to fully understand the local market policies, tax risk points, and approximate costs, and roughly understand the real "temperature of the water".

For example, we will customize investment reports for enterprises in different markets. For regions like the United States, where the tax system is relatively special and the enterprise business scale is large, we also have experts who study the tax systems of specific regions. They summarize their knowledge and project experience into basic knowledge manuals and regularly update and share them with clients to keep up with the dynamic changes of the target market in a timely manner.

3. Don't ignore the role of Hong Kong as a flexible "bridgehead"

Misunderstanding: To do a good tax planning, you only need to focus on the compliance policies of the destination for going global

Wang Xueyin: When enterprises go global, they often focus all their attention on the destination, after all, their customers are there. However, enterprises may find that service institutions often propose to set up institutions in Hong Kong when providing solutions. Sometimes, enterprises don't understand this approach, thinking that the market itself is not in Hong Kong, and it doesn't seem like a real "going global".

But in fact, Hong Kong is a flexible transit station for enterprises to expand overseas business, which can be used for both offense and defense. Firstly, there is no foreign exchange control in Hong Kong. When an enterprise has not decided where to go, it can stay in Hong Kong first and go out at any time after deciding to go global. If it is in the Chinese mainland, it needs to go through the ODI approval. By the time the enterprise has made a decision and gone through the process, it may have missed the investment opportunity.

Secondly, the overall tax cost in Hong Kong is lower. One is that the tax system is simpler than that of the Chinese mainland and there are fewer types of taxes. The other is that the overall tax rate is lower. If the salaries of some senior management personnel are paid through a Hong Kong company, a part of the tax burden cost can be reduced. Thirdly, tax declarations are made on an annual basis, while in the Chinese mainland, they are generally made monthly or quarterly, so the financial workload will also be less.

Thirdly, Hong Kong export enterprises enjoy offshore exemption. When an enterprise exports goods, if the container does not actually enter Hong Kong, it is not considered a real business that occurs in Hong Kong and is not subject to taxation. Moreover, there are bilateral tax treaties between Hong Kong and some countries such as Indonesia, and the tax cost is lower than that of exporting from the Chinese mainland.

In the process of actually serving clients, some enterprise owners may think that the functions of Hong Kong and Singapore are similar and have a higher acceptance of Singapore. However, under the premise of similar tax burdens, from the perspective of actual operating costs, the enterprise operation and maintenance costs in Singapore are much higher than those in Hong Kong. In terms of policy relevance, Singapore also does not have the advantage of close linkage with the Chinese mainland like Hong Kong. Therefore, considering compliance, cost control, and business suitability comprehensively, we recommend that enterprises choose Hong Kong first.

Introduction to U&I GROUP

U&I GROUP, as a cooperation partner for cross - border legal, business, and tax services on the platform, is headquartered in Hong Kong. It has license qualifications and professional teams such as CPAs, lawyers, secretaries, and registered agents in cross - border relevant jurisdictions. As one of the earliest professional teams for offshore comprehensive services in China, it has been deeply involved in the overseas development needs of enterprises and entrepreneurs for two decades. Relying on more than twenty domestic and overseas branches and a service network covering more than 160 countries and regions around the world, it provides enterprises with an overall solution of "compliance inspection - structure optimization - risk isolation" together with the platform. The collaboration between the platform and the service provider is forming a compliance ecosystem of "government guidance - platform coordination - professional implementation", helping Chinese enterprises to operate steadily in the global market.