Posted by Jane Peng on April 27, 2010 under Anti-Avoidance, Tax Controversy | 
The new Rules for the Tax Administrative Review (Order of SAT [2010] No. 21) (hereinafter the “New Rules”), issued by the State Administration of Taxation (“SAT”), have superseded the Interim Rules for the Tax Administrative Review (Order of SAT No. 8). One of the aims of the New Rules is, arguably, to increase protection of the legal rights of taxpayers and other interested parties. It is also evidence that one purpose is to ensure supervision of the tax authorities so that they lawfully exercise their authority. The New Rules introduce several major modifications to the tax administrative review system, such as the scope of administrative review, rules on admissible evidence and the method of hearings.
However, probably the most significant change is the introduction of a compromise and conciliation system in accordance with Articles 40 and 50 of the New Rules. Whilst negotiation with the tax authorities in China, both prior to commending litigation and during litigation, is already a common practice there were long standing concerns about the legality of such practices and whether agreements that had been reached were, in fact, enforceable. The New Rules seek to provide a stronger legal basis for such practices.
Compromise Agreements
The New Rules outline the requirements for a binding compromise agreement. It is first noted that the content of a compromise agreement shall not damage the interests of the public and/or individuals. Once a compromise agreement has been approved by the relevant administrative review organ, an applicant is not permitted to apply for review on basis of the same fact and reason. However, apart from this, the New Rules do not specifically detail the legal effect of a compromise agreement. There are still concerns as to the extent to which a compromise agreement can be enforced. It is also not clear whether the applicants can revoke a compromise agreement and reapply for review should new evidence come to light. Finally, the New Rules do not outline that the action that can be taken when one party does not meet their obligations under the compromise agreement.
The new Rules represent a significant attempt by the SAT to bring legitimacy and transparency to the tax administrative review system in China. Whether they achieve such an aim is yet to be seen.
Posted by Sunny on March 18, 2010 under China Tax, Tax Controversy |
On 10th February 2010 the State Administration of Taxation (SAT) issued new Tax Administrative Review Rules (SAT Order [2010] 22) (the “Rules”) providing a comprehensive guideline for tax disputes in China. There are 105 articles in the Rules, which is 53 more articles than was contained in the original. A fundamental component of the new Rules is the introduction of a reconciliation and compromise system. The Rules are operable from 1 April 2010.
Reconciliation and compromise
As introduced by the stakeholder, the added reconciliation and compromise system stipulates the applicable scope and fundamental principle of the reconciliation and compromise. It also designs details of procedures and requirements . The new rules allow the applicant and the respondent to reach a settlement agreement voluntarily and the administrative review shall terminate after permitted by institution of administrative review, however , the applicant shall not apply the administrative review again for the same fact and reason .The institution of administrative review shall conduct the conciliation in accordance with the principle of voluntary.
Other issues
Some of the other more important changes in the Rules include guidance on the admissibility of evidence, a shift from documentary hearings to full public oral hearings, stipulations on which level of local taxation bureaus have jurisdiction for administrative review and a direction that tax authorities of all levels must provide guidance and supervision in respect of tax administrative review.
A translation of the new Rules will be posted on the Hwuason website within the next 7 days.
Posted by Matthew on February 1, 2010 under Anti-Avoidance, China Tax, Tax Controversy |
In 2008 China dramatically reformed its taxation system through the introduction of the Enterprise Income Tax Law. There were two substantial changes brought about by the EITL. Firstly, it removed the previous tax distinction for domestic enterprises and foreign invested enterprises (FIEs) under which FIEs had been subject to a highly concessional rate of tax. The second significant change was the introduction and strengthening of China’s international anti-avoidance rules. This included a wider definition of a tax resident company, the introduction of rules relating to thin capitalisation, extensive documentation requirements in respect of transfer pricing, the introduction of a general anti-avoidance rule and controlled foreign company rules.
Throughout 2008 and 2009 various regulations, measures and circulars were promulgated at all levels of the tax administration system for the purpose of implementing the new law. The SAT spent much of 2009 assembling an large enforcement team and hired 500 more officials. One common theme in all of this was the push to target the shifting of profits off-shore. It had been quite a common practice, up until 2008, for foreign invested enterprises to effectively generate no profit in China through an array of related party transactions. As a result of this new environment, nearly all foreign invested enterprises have had to undertake a review of their structures.
It is also important to note that, and in the usual manner of Chinese bureaucratic politics, traditionally local tax bureaus only sporadically, if at all, followed the mandate of the State Administration of Taxation (SAT). This was because the local tax bureaus were also answerable to the provincial and local level governments. Such governments were more interested in encouraging investment in their regions, then ensuring that national level policies were followed to the letter of the law. Accordingly, many legal and non-legal concessional arrangements were entered into at a local level. However, more recently there has been a growing willingness by the local tax officials to follow intructions from the national guys. This has three potential implications. Firstly, we can expect national level policies to enforced more effectively and consistently at a local level. Secondly, many non-legal concessional tax arrangements that were entered into in the past may no longer receive protection by the local officials. Thirdly, it will be less likely that such arrangements will occur in the future.
Yet, we are yet to feel the full brunt of the changes. This is because the tax authorities, whilst having undertaken internal reviews of files, have generally not put taxpayers on notice that they are being subject to an investigation in respect of the 2008 year. The authorities commenced their internal reviews in May/June 2009 and, from what we have been told, will commence sending out notices of tax adjustments in the first quarter of this year. Interesting times ahead – for us anyway.
Posted by Shi Zhiqun on January 28, 2010 under Tax Controversy |
Here are some selected recent tax disputes in China.
- Guangxi Jiayuan Real Estate Company fined RMB 1.44 million for failure to declare income from sale of shares – In a very simple case of tax avoidance the taxpayer failed to disclose its income from an equity transfer and accordingly was required to pay the full amount of tax on RMB 1.51 million plus a late fee surcharge of RMB 430,000 in addition to the above penalty.
- Fujian foreign invested enterprise receives transfer pricing adjustment – In a case decided late last year in Fujian, the local authorities investigated a FIE’s transfer pricing practices over a 6 year period. In reliance on the new anti-avoidance provision in the Enterprise Income Tax Law, the authorities re-adjusted the taxable income of the company and increased it by RMB272.9 million. Reports indicate that the company was relatively content with the result, suggesting that it’s potential exposure was significantly higher. The fine was the result of a negotiated settlement between the authorities and the taxpayer.
- VAT Invoice forger sentenced to 15 years in prison – Ye Mou Biao has been sentenced to 15 years in prison by the Zhuhai Intermediate People’s Court and fined RMB500,000 after creating RMB400 million worth of fake VAT invoices. Ye Mou Biao’s conduct resulted in a loss of tax revenue in the amount of RMB12.463 million
Posted by Li Wei on January 27, 2010 under Anti-Avoidance, China Tax, Tax Controversy |
In 2009, 13803 cases of fraudulent use of tax invoices were uncovered by public security departments throughout China. As a result, the Chinese government collected RMB1.226 billion in additional tax and a further RMB233 million in fines.
