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China to crack down on tax avoidance by foreign firms: Xinhua

A shadow of a man using his mobile phone is cast near Microsoft logo at the 2014 Computex exhibition in Taipei June 4, 2014. REUTERS/Pichi Chuang

SHANGHAI (Reuters) - China will toughen its stance on tax avoidance by foreign firms to prevent tax payments being directed overseas, the official Xinhua news agency has said, after Beijing levied $140 million in back taxes from U.S. firm Microsoft Corp (MSFT.O) last week.

Beijing will closely monitor the profit levels of foreign firms operating in China to ensure companies do not shift profits to other regions where taxes are lower, a practice known as "base erosion and profit shifting" (BEPS), the Xinhua report late on Monday said.

China is cracking down on business practices by overseas firms in China, with a series of probes by anti-trust regulators prompting business lobbies to say multinational firms were being singled out by Beijing.

Xinhua reported last week that a U.S. company whose name starts with "M" must pay the Chinese government 840 million yuan ($137 million) in back taxes and interest, as well as more than 100 million yuan in additional taxes a year in the future.

The report said the firm was one of the world's 500 biggest firms and had established a wholly owned foreign subsidiary in Beijing in 1995. Microsoft, which did not deny its involvement, is the only company that fits that description.

"China will coordinate with other countries to clamp down on BEPS plotting and cross-border tax avoidance," Zhang Zhiyong, deputy director of the State Administration of Taxation, told Xinhua.

Chinese President Xi Jinping and other G20 country leaders pledged to increase efforts to prevent tax avoidance last month.

China is the largest country for foreign direct investment but this fell for the fourth straight period on a cumulative basis in October, underscoring investor caution as the world's second-largest economy cools.

(Reporting by Adam Jourdan; Editing by Paul Tait)