Tax evasion among foreign-invested property enterprises in Guangzhou was rampant last year, and steps will soon be taken by the authorities to clamp down on the situation. It was learned that foreign-invested property enterprises' outstanding tax liabilities have ranked top among all FIEs for six consecutive years since 2000. Hong Kong investors should take note.

In an extensive investigation conducted recently by the Guangzhou land tax audit authorities on foreign-invested property development enterprises, it was found that 57, or 70%, of the 81 enterprises investigated breached tax laws last year. They have been ordered to pay in arrears a total tax amount of Rmb99.36 million.

The highlights of the investigation results are as follows. First, an increase of Rmb63.7 million, or 179%, in outstanding tax liabilities in 2005 over 2004 was recorded. Second, outstanding tax liabilities of foreign-invested property enterprises continued to make up a large share (60%) of FIEs' total outstanding tax liabilities, up 31% from 2004. Third, seven foreign-invested property enterprises investigated had an average outstanding tax amount of Rmb1.74 million, way above the average of Rmb440,000 in other sectors. Fourth, one particular foreign-invested property enterprise was the "leading" tax-evader, with its delinquent tax amount topping Rmb20.96 million, making it the case that involved the largest tax dodging amount in Guangzhou in 2005.

According to the Guangzhou land tax audit authorities' analyses, foreign-invested property enterprises evaded tax by ways of excluding income from property sales in their accounts or including them under other non-income items on a long-term basis to avoid paying local taxes. Nine foreign-invested property enterprises investigated were found to have engaged in such malpractice.

Another major means to evade tax was to assign residential units, shops and car parks to the companies' Chinese partner without making tax declarations. Seven enterprises investigated were found to have evaded tax by this means, involving a total delinquent tax amount of Rmb19 million. Other property enterprises evaded tax by excluding from their turnover for tax purposes the charges collected on behalf of property owners for installation of gas pipes, cable TV and anti-theft doors, or not making tax declarations on transfer of land use rights as required. It was also found that some enterprises failed to pay tax on time owing to cash flow problems, which might have arisen as a result of their huge capital investment, long development cycle, slow capital recovery or changes in government policies with impacted on their business.