Authorized Tax Collection: Analysis on its Potential Tax Risks and Possible Solutions

Posted by hwuason2012 on June 4, 2013 under Corporate Tax Planning | Be the First to Comment

Authorized tax collection refers to the act that tax authorities authorize companies or individuals to collect taxes in certain situations. In fact, it could be seen in many areas, for instance, tax authorities authorize maritime administration authorities to collect vehicle and vessel tax, authorize banks to collect urban maintenance and construction tax, education surcharges and individual income tax of individual industrial and commercial households, authorize subdistrict offices to collect taxes relating to individual house rental, etc. It has no doubt that authorized tax collection plays an important role in strengthening tax administration and providing convenience for tax payment. However, it also faces many problems, such as the authorized party not remitting taxes promptly, not providing tax payment receipts to taxpayers, etc.
Recently State Administration of Taxation released the Administrative Measures for Authorized Tax Collection (Announcement of State Administration of Taxation [2013] No.24) to clarify certain aspects concerning scope of authorized tax collection, effect and termination of authorized tax collection agreement, especially to clarify the legal liabilities of the authorized party. In practice, some companies are not fully aware of potential tax risks when authorized to collect taxes and act against relevant regulations. With the promulgation of Announcement No.24, companies shall pay special attention on such tax risks and take steps to avoid risks.
1. Common Issues Met by Companies in Authorized Tax Collection
In most authorized tax collection cases, tax authorities do not gain enough tax information about the taxpayers and largely depend on authorized party to collect taxes since the taxpayers are much too scattered. Therefore, it may easily lead to the following issues.
(1) Fail to Remit Taxes Promptly
Lacking information about the taxpayers, tax authority could scarcely figure out the exact amount which the authorized party shall collect. What’s more, some authorized tax collection agreements may not contain a clause about the time periods to remit taxes. Therefore, it may easily occur that the authorized parties fail to remit taxes promptly. It is alleged that a real estate company was authorized to collect business tax and surcharges, individual income tax, enterprise income tax of construction companies. However, part of the collected taxes were not remitted but used by the real estate company for other purposes, such as repaying debts, etc.
(2) Decide to Collect Less Taxes without Permission
Most authorized parties are companies or individuals rather that tax authorities, and they are likely to collect taxes at their own wish, such as collecting less taxes or charging additional fees for issuing invoices, owing to their lacking awareness of tax law and the uncertainty of the authorized agreements. It was reported that three authorized companies once improperly issued invoices and collected less taxes by lowering the tax rate, of which the tax amount reached 124 million.
(3) Far Exceed the Authorized Scope
The authorized parties are authorized to collect taxes and they are not given the power to make administrative punishments. However, in order to gain more commissions, some authorized parties far exceed the authorized scope and required taxpayers to pay more taxes or even penalties. In practice, some authorized parties also detained properties of taxpayers which obviously did not comply with the tax law.
2. Potential Tax Risks and Possible Solutions
The newly issued Announcement No.24 targets at previous major violations in authorized tax collection and imposes strict legal liabilities on these violations respectively.
(1) Liquidated Damages of 0.05% per Day
According to Announcement No.24, provided that the authorized party failed to remit taxes, the tax authority shall order it to remit taxes within a certain time limit and may require it to pay liquidated damages of 0.05% per day. Provided that the authorized party did not collect or collect less taxes, the tax authority shall require the taxpayers to pay taxes and meanwhile may require the authorized party to pay liquidated damages of 0.05% per day. It is usually the case that the authorized party did not collect or collect less taxes for a relatively long period, it may accumulate to a significant amount under the condition of liquidated damages of 0.05% per day, though the original amount may be quite a small figure.
Therefore, Hwuason Lawyers suggest the company comply with the tax law and the agreement and fulfill its authorized tax collection obligations carefully in order to avoid the risks of paying liquidated damages.
(2) Early Termination of Authorized Tax Collection Agreements
According to the Announcement, the tax authority may terminate the authorized tax collection agreements in advance provided the authorized party frauds, fails to fulfill its obligations, or seriously violates the tax law or the agreement. So in the above mentioned case of failing to collect or collecting fewer taxes, except from the risk of liquidated damages of 0.05% per day, the authorized party may also bear the risk of early termination of the agreement.
(3) Compensation for Losses
According to Announcement No.24, provided with losses on tax receipts printed with fixed amount, the authorized party shall compensate for such losses according to their face value. Provided the authorized party not receiving, keeping, issuing tax receipts as required, tax authority may deduct its commission of collecting taxes. Therefore, the authorized party shall pay special attentions on the tax receipts administration to avoid unnecessary economic losses.
(4) Legal Liabilities Pursued Afterwards
According to Announcement No.24, any tax disputes caused by authorized tax collection are solved and born by tax authority, but tax authority has the right to pursue the legal liability of the authorized party afterwards. Therefore, the authorized party bears the risk of being holing liable afterwards, though it has no risk of tax disputes with taxpayers directly.
Therefore, Hwuason Lawyers suggest the company aware of the authorized scope and act within the authorized limits to avoid potential tax disputes with any taxpayers. Provide the taxpayer rejected to pay taxes, companies shall report it to the tax authority in time instead of any tax enforcement measures.

For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). You can visit our website at www.hwuason.com or our tax blog at www.chinataxblog.com.

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Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.

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