Spanish Inspectors Target Chinese Import Distributors

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By Brett Allan King

Spanish tax agents have raided 61 industrial warehouse complexes nationwide, launching ongoing investigations into 66 companies suspected of value-added tax and corporate tax fraud in the government’s latest move against alleged irregularities involving the distribution of Chinese imports.

The tax agency’s company searches launched June 8 under “Operation Dragon” are just the beginning of investigations that, over “coming quarters,” will look into suspected irregularities such as the underreporting of profits by up to 20 times actual profit for company tax purposes, according to the tax agency.

“There is a huge demand for Chinese products, which are imported at a greatly under-declared value” with subsequent underreported sales, and the companies under investigation “have been selected in accordance with a series of risk patterns, which doesn’t mean the rest of the sector is doing things correctly,” a treasury ministry source told Bloomberg BNA June 8.

“What we’re trying to do is warn and compel the entire sector to start declaring correctly,” the source told Bloomberg BNA.

According to a statement by the tax agency, months of observation suggest that alleged irregular practices include large cash purchases, fake billing, off-the-record sales, and the irregular use of shared bank accounts to send remittances to suppliers or business owners’ accounts in China.

Further, the agency said sector companies have been declaring on average a return on sales of 1.7 percent when the real average sector value is closer to 40 percent.

“This is far from the first time the taxation agency has addressed the the low-cost sector of Chinese merchants to regularize their situation,” Javier Gómez Taboada, a tax area partner at MAIO Legal in Vigo, told Bloomberg BNA June 9.

Operation Dragon is the latest in a series of tax agency investigations into the Chinese import sector. Other significant investigations took place in 2013, 2014, and 2016.

Despite the China connection, “I’d frame this as a normal action by the tax agency, just like for any other sector, and wouldn’t treat it any differently,” said Gómez, adding that the investigation nonetheless serves to undermine the unfounded Spanish urban myth that Chinese-run business get some sort of preferential tax treatment.

Limited Partnerships

The names of companies under investigation remain secret and the amount of any defrauded tax won’t be known until after the investigations are complete. However, the treasury ministry source told Bloomberg BNA that the inspections don’t involve major Chinese online vendors and also didn’t state whether any are multinational corporations or their subsidiaries; the companies in question are generally limited partnerships registered in Spain, primarily by Chinese-born individuals.

The tax agency said in a statement that that the raided warehouses may account for up to half of imports in some sectors arriving in containers from China, such as textiles, toys, or small appliances.

“When a sector is put under the spotlight for suspected relation to the underground economy, and it ends up being confirmed, then obviously that economic operator is engaging in unfair competition with regard to their competitors who operate in the light of day and are up to date on their taxes,” Gómez told Bloomberg BNA. He added that the importation of Chinese products doesn’t necessarily differ from other Spanish sectors in this regard.

The Spanish Confederation of Business Organizations told Bloomberg BNA that none of its members have approached the association regarding this matter.

The Association of Chinese Merchants and Entrepreneurs of Spain didn’t respond to an interview request.

To contact the reporter on this story: Brett Allan King in Madrid at psukhraj@bna.com

To contact the editor responsible for this story: Penny Sukhraj in London at psukhraj@bna.com

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