Bank of China Has Been Accused of Using Mutual Funds to Avoid Taxes

A Chinese state audit has accused a subsidiary of Bank of China of using disguised mutual fund structures to reduce its tax obligations, resulting in unpaid taxes of 2.5 billion yuan ($348 million).

According to findings released by the National Audit Office, the bank structured certain investment products in a manner that enabled it to avoid taxes that would otherwise have been payable. Auditors said the arrangements involved mutual fund vehicles that were allegedly used to conceal the true nature of transactions and reduce tax liabilities.

The audit forms part of a broader review of financial institutions conducted by Chinese authorities as Beijing intensifies efforts to strengthen oversight of the banking sector and improve fiscal compliance. Regulators have increasingly focused on identifying loopholes and financial practices that erode government revenues, particularly at a time when economic growth has slowed and fiscal pressures have mounted.

Bank of China, one of the country’s largest lenders, has not publicly disputed the audit findings. Chinese state auditors said the institution has already begun corrective measures and is taking steps to address the identified issues.

The case highlights the growing role of China’s audit authorities in scrutinising large state-owned enterprises and financial institutions. In recent years, audits have uncovered a range of issues, including irregular lending practices, weak internal controls and breaches of financial regulations across multiple sectors of the economy.

Authorities have made strengthening tax collection a priority as local governments face mounting fiscal challenges. A prolonged property market downturn, weaker land-sale revenues and slowing economic activity have placed pressure on public finances, increasing the importance of improving tax compliance and reducing revenue leakages.

The 2.5 billion yuan ($348 million) identified by auditors represents one of the more significant tax-related findings disclosed in this year’s audit reports. While the amount is relatively small compared with the size of Bank of China’s overall balance sheet, the case has attracted attention because it involves one of China’s systemically important financial institutions.

The findings also underscore the complexity of modern financial products and the challenges regulators face in ensuring that investment structures are not used to circumvent tax obligations. As China’s financial markets have become more sophisticated, regulators have had to devote greater resources to monitoring transactions that may blur the line between legitimate tax planning and tax avoidance.

The audit comes amid broader efforts by Beijing to reinforce financial discipline across the banking system. Chinese regulators have spent the past several years tightening oversight of risk management, shadow banking activities and corporate governance practices in an effort to safeguard financial stability.

For investors, the case is unlikely to pose a significant threat to Bank of China’s operations. However, it serves as another indication that Chinese authorities are becoming more aggressive in examining the conduct of major financial institutions and enforcing compliance with tax and regulatory requirements.

The audit findings also send a wider message to the financial sector that increasingly complex investment structures will face closer scrutiny as regulators seek to improve transparency, strengthen governance and protec government revenues.

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