Currently, there is no unified revenue code in China. The Chinese tax law system consists of four laws, including the Enterprise Income Tax Law of the People’s Republic of China; about 30 administrative regulations, including the Interim Regulation of the People’s Republic of China on Value Added Tax; and more than 50 departmental rules, including Detailed Rules for the Implementation of the Interim Regulation of the People’s Republic of China on Value Added Tax and other tax regulatory documents. Taxes are divided into national taxes and local taxes, which are collected and managed by bureaux of state taxation and bureaux of local taxation respectively. National taxes and local taxes make up national and local financial income. The State Administration of Taxation is the agency directly under the State Council, which is in charge of tax collection and management.
Usually, tax disputes are divided into tax administrative disputes and tax criminal disputes. The resolution of tax administrative disputes consists of four stages:
- a consultation and communication between taxpayers and taxation authorities before the notification of tax administrative decisions and penalties is made;
- b tax administrative penalties hearing procedure;
- c tax administrative reconsideration; and
- d tax administrative litigation.
Tax disputes are mostly solved during the first stage, and hardly ever through litigation. The amount of time and money required to resolve a tax dispute depends on which phase it is in. It could take a few months to several years. Parties involved pay no fees during these stages except for tax administrative litigation. However, taxpayers have to pay late fees if tax is not paid as required before the deadline. In criminal tax disputes, the party may break the criminal law and would therefore be sentenced in a criminal prosecution.
Overall, the concerned party has to pay few fees to the taxation authorities or the courts to resolve a tax dispute. However, they may have to spend several months to several years on it, depending on the complexity of the case and the effect of communication. To solve tax disputes smoothly, the taxpayers should communicate positively with the taxation authorities to reach a resolution acceptable to both parties.
II COMMENCING DISPUTES
i Consultation and communication between taxpayers and taxation authorities
Taxpayers have the right to state their views and make their claims during tax inspections. Taxation authorities deliver a notice of related tax matters to taxpayers, in which the proposed tax administrative decisions and penalties and the rights of taxpayers are clarified, before a formal notification of tax administrative decisions and penalties is made. Although arguments and defences are not required in writing by law, a written response would be the better choice for defending a taxpayer’s rights more effectively.
ii Tax administrative penalties hearing procedure
Before making a decision on a tax administrative penalty where a taxpayer involved is to be fined more than 2,000 renminbi, or a legal person or other organisation involved is to be fined more than 10,000 renminbi, the taxation authorities will:
- a notify all parties concerned of the illicit act;
- b provide evidence;
- c establish the legal basis for administrative punishment; and
- d establish the administrative punishment to be given to the party concerned, and that he or she has the right to request a hearing.
The party should request a hearing within three days after being notified by the taxation authorities. The failure of an applicant to raise such a hearing request before the prescribed time limit is deemed as waiver of the hearing right.
iii Tax administrative reconsideration
With the exception of certain cases, tax administrative reconsideration is not a necessary legal procedure prior to tax administrative litigation. Generally, the applicant should apply for the tax administrative reconsideration within 60 days from the date when they become aware of such administrative acts. When refusing to accept a specific administrative act taken by bureaux of state taxation, the applicant should apply to the competent bureau of state taxation at a higher level for administrative reconsideration. When refusing to accept a specific administrative act taken by bureaux of local taxation, the applicant may choose to apply to the people’s government at the same level or to the competent bureau of local taxation at a higher level for administrative reconsideration. The applicant may apply for administrative reconsideration in written or oral form, but applying in writing is the better choice to make clear any claims and reasons.
Specifically, administrative reconsideration organs will accept the administrative reconsideration applications filed by applicants against the following specific administrative acts made by taxation authorities:
- a acts of tax collection, including the determination of taxpayer, taxation object, taxation scope, tax deduction, tax exemption, tax refund, tax credit, applicable tax rates, tax calculation basis, time limit for tax payment, tax payment place, tax collection methods and other specific administrative acts. In addition, the collection of tax, additional collection of late fees, and the tax withholding, collection and payment acts by the tax withholding agents and entities and individuals authorised by taxation authorities, etc.;
- b administrative licensing and administrative examination and approval acts;
- c invoice management acts, including issuing and taking over invoices, issuing invoices on a commissioned basis, etc.;
- d tax preservation acts and compulsory enforcement acts;
- e acts of administrative penalties: fines; confiscation of property or illegal gains; or suspension of the right to export tax refunds;
- f acts of failing to perform the following duties in accordance with law:
• issuing tax registration certificates;
• issuing or providing tax-paid certificates or tax administration certificates for business activities carried out in other places;
• administrative compensation;
• administrative awards; or
• other acts of failing to perform duties in accordance with the law;
- g acts of determination of eligibility;
- h acts of failing to confirm guarantees for tax payments in accordance with the law;
- i specific administrative acts in government information disclosure work;
- j acts of tax credit rating;
- k acts of informing entry-exit organs to prevent some people from leaving China; or
- l other specific administrative acts.
iv Tax administrative litigation
An administrative counterpart can bring suits before a people’s court within six months from the day when he or she knows that an administrative act has been undertaken or within l5 days from the day of the receipt of the reconsideration decision against any of the following matters (except as otherwise provided for by law):
- a refusing to accept a tax administrative sanction;
- b refusing to accept a tax compulsory administrative measure or compulsory administrative enforcement;
- c infringement upon one’s managerial decision-making powers that is considered to have been perpetrated by an administrative organ;
- d refusal by or failure of a tax authority to respond within the statutory time limit to an application for administrative permits or refusing to accept other decisions relating to administrative permits as rendered by a tax authority;
- e cases where an administrative organ is considered to have illegally demanded the performance of duties; and
- f other administrative suits that may be brought in accordance with the provisions of relevant laws and regulations, such as an administrative compensation cases and company registration cases.
Where an applicant has an objection to any of the acts of tax collection (including the determination of the taxpayer, taxation object, taxation scope, tax deduction, tax exemption, tax refund, tax credit, applicable tax rates, tax calculation basis, taxation links, time limit for tax payment, tax payment place, tax collection methods and other specific administrative acts, collection of tax, additional collection of late fees, and the tax withholding, collection and payment acts by tax withholding agents and entities and individuals authorised by tax organs), he or she shall first file an administrative reconsideration application with the administrative reconsideration organ. If the applicant refuses to accept the administrative reconsideration decision, he or she may lodge an administrative lawsuit with the people’s court.
A tax administrative case will be under the jurisdiction of the people’s court in the locality of the tax authority that initially undertook the administrative act. A reconsidered case may also be placed under the jurisdiction of the people’s court in the locality of the tax authority conducting the reconsideration. Regarding the jurisdiction of a court, there are special regulations on lawsuits against compulsory administrative measures restricting the freedom of a person or regarding real estate. The Chinese court system is divided into four levels: basic people’s courts, intermediate people’s courts, higher people’s courts and the Supreme People’s Court. Additionally, there are military courts, railway courts, maritime courts and other special people’s courts. The basic people’s courts have jurisdiction as courts of first instance over tax administrative cases. The intermediate people’s courts and higher people’s courts have jurisdiction as courts of first instance over grave and complicated administrative cases in areas under their jurisdiction. The Supreme People’s Court has jurisdiction as a court of first instance over grave and complicated administrative cases involving the whole country. In practice, a case against China’s state administration of taxation is under the jurisdiction of the intermediate people’s court. The higher people’s court and the Supreme People’s Court seldom accept tax administrative cases as courts of first instance, and they focus on the trial of second instance cases and supervising the work of subordinate courts.
v Tax criminal litigation
If the taxation authority finds that a crime has been constituted, it shall transfer the case to the judicial authorities to be investigated for criminal responsibility in accordance with the law.
III THE COURTS AND TRIBUNALS
i Tax dispute resolution procedures before litigation
In the tax inspection procedure, the negotiation between taxpayers and the taxation authorities is not a formal but a legal tax disputes resolution procedure. The taxation authorities may or may not review taxpayers’ statements and arguments, and the negotiation may or may not have an effect on the administrative decision or the administrative penalty.
The tax administrative penalty hearing and tax administrative reconsideration are two formal tax dispute resolution procedures. During the procedure of the tax administrative penalty hearing, a presider is appointed by the taxation authorities, who shall not be one of the investigators in the case. When the taxpayer considers that the presider has a direct interest in the case, he or she is empowered to request disqualification. In tax administrative reconsiderations, an administrative reconsideration organ hears an tax administrative case; usually there will be two members of staff present. In principle, an administrative reconsideration takes the form of a written examination; however, when the applicant requests, or the departments in charge of the legal work under an administrative reconsideration organ deem it necessary, an investigation may be conducted among the organisations and persons concerned, and the opinions of the applicant, the defending party to the application and the third party are taken into account. A tax administrative penalty hearing and tax administrative reconsideration usually will not last long.
ii Tax administrative litigation
First instance over tax administrative cases
The people’s courts, independent from taxation authorities, have jurisdiction as courts over tax administrative cases. Generally, there are administrative tribunals in people’s courts that are in charge of the trial of administrative cases. A people’s court shall render a judgment of first instance within six months from the day of placing the case on file. Any extension of the time limit necessitated by special circumstances shall be approved by a high people’s court. An extension of the time limit for handling a case of first instance by a high people’s court shall be approved by the Supreme People’s Court.
Second instance over tax administrative cases
If a party refuses to accept a judgment of first instance by a people’s court, he or she has the right to file an appeal with the people’s court at the next higher level within 15 days of the serving of the written judgment. If a party refuses to accept an order of first instance by a people’s court, he or she has the right to file an appeal with the people’s court at the next higher level within 10 days of the serving of the written order. All judgments and orders of first instance by a people’s court that have not been appealed within the prescribed time limit are legally effective. In handling a case of appeal, the people’s court makes a final judgment within three months from the day of receiving the appeal. Any extension of the time limit necessitated by special circumstances shall be approved by a high people’s court. Any extension of the time limit for handling a case of appeal by a high people’s court is approved by the Supreme People’s Court.
Amendment of the administrative litigation law
On 1 November 2014, the administrative litigation law was extensively amended, and the amendments mainly affect tax administrative litigation in the following four aspects.
- a Strengthening the reconsideration agency’s defendant liabilities. Under the old regulation, when the reconsideration agency decides to sustain the original administrative action, it shall not be the defendant. However, under the new rule, if the reconsideration agency’s decision sustains the original administrative action, the taxpayer is entitled to sue the administrative agency and the reconsideration agency at the same time, and the administrative agency and the reconsideration agency shall be co-defendants.
- b Doubling the time limit to sue. According to the new law rules, a taxpayer’s time limit to sue is doubled from three to six months, which reduces the chances of exceeding the time limit.
- c Establishing the rationality of judicial review. Under the old rules, the court could only review the legality of specific administrative acts. However, the new rules state that the court shall review both the legality and rationality of the administrative action being sued, and if the defendant cannot prove the rationality or the plaintiff cannot prove that the sued administrative action obviously lacks rationality, the court shall enter a judgment to entirely or partially revoke the administrative action being sued.
- d Mediation is allowed in limited circumstances. The amended law allows the court to conduct mediation between the plaintiff and the defendant if the case involves administrative compensation or indemnity, or involves an administrative agency’s exercise of discretionary power prescribed by any law or regulation.
iii Tax criminal proceedings
Tax criminal proceedings are similar to general criminal proceedings, and include opening a case, a criminal investigation, initiation of public prosecution, and procedures at first instance and at second instance. Depending on the case’s complexity, the criminal proceedings from opening a case to pronouncing judgment may take several months or several years.
IV PENALTIES AND REMEDIES
Administrative penalties by taxation authorities include fines, confiscating illegal gains, suspending tax refunds for exports and revoking a tax registration certificate. Among these, fines are the most common penalty. According to the provisions of tax law, the fine can be five times as high as the tax involved. In practice, the fine ordinarily varies from the same amount as the tax involved to twice as much.
If the involved party breaks the criminal law, he or she should be tried for criminal responsibility by the court in accordance with the law. According to the criminal law of China, there are more than 20 tax-related crimes, including tax evasion, refusing to pay taxes, export tax refund fraud, falsely making specialised VAT receipts, and practising favouritism to over-collect or under-collect tax. If someone were to be convicted of such a crime, the most severe penalty would be life imprisonment.
V TAX CLAIMS
i Recovering overpaid tax
When the taxation authorities discover that a taxpayer has made a tax payment in excess of the amount of tax payable, they immediately refund the excess payment. When a taxpayer discovers the same, he or she may, within three years from the date the payment is made, claim from the taxation authorities a refund of the excess payment, plus the interest calculated according to the bank interest rates at the time. The taxation authorities shall immediately pay back the money upon examination and verification of the case. Where such a refund involves the State Treasury, it shall be dealt with in accordance with the provisions on the administration of the State Treasury in the relevant laws and administrative regulations. The taxpayer can ask to be allowed to deduct the excess payment from a later tax payment instead.
ii Challenging administrative decisions
China does not have a common law system. Specific administrative actions are only based on tax laws and regulations. As such, it is not feasible to challenge an administrative decision on the grounds of it being dissimilar to an administrative decision in a similar case. In actual fact, it is normal for administrative decisions to differ in similar cases because of the discrepancy in law enforcement.
Only an administrative counterpart is allowed to initiate the resolution procedure of tax disputes: that is, taxpayers or tax-withholding agents and other related parties. In practice, business counterparts usually reach a tax-sharing agreement in contracts. If the tax burden changes due to a tax dispute, entities or individuals that are obligated to pay tax in accordance with the law or the administrative regulations must bear the tax burden. A dispute over a change of trading costs should be solved through consultation and dialogue between the parties concerned. Should consultation fail, the party can file a civil lawsuit.
iv Tax administrative compensation
Where the taxation authorities or tax officials, in exercising their functions and powers, have infringed upon the legitimate rights and interests of taxpayers and other related parties, thereby causing damage to them, the taxation authorities should pay state compensation to the victims. A claimant who demands compensation should first apply to the organ liable for the compensation, or make demands for it simultaneously when applying for administrative reconsideration of the case or when bringing an administrative action. The taxation authority liable for compensation should, within two months from the date of receiving the application, make a decision on whether to provide compensation. If the claimant raises an opposition against the form, item or amount of compensation, or the organ liable for compensation makes a decision to reject the compensation claim, the claimant can bring a suit in a people’s court within three months of the decision.
Specifically, the victim has the right to compensation if a taxation authority or its taxation officials, in exercising their administrative functions and powers, commit any of the following acts infringing upon the property and personal rights of a citizen:
- a illegally inflicting administrative penalties, such as the imposition of fines, ordering the suspension of production and business, or the confiscation of property;
- b illegally implementing compulsory administrative measures such as sealing up, distraining or freezing property;
- c illegally collecting tax;
- d other illegal acts causing damage to property;
- e detaining a citizen in violation of the law or unlawfully taking compulsory administrative measures in restraint of his or her personal freedom, or unlawfully taking a citizen into custody or depriving him or her of his or her personal rights by other unlawful means;
- f using, instigating or allowing another to use means such as violence or abuse, thereby causing bodily injury or death to a citizen;
- g unlawfully using weapons or police restraint implements, thereby causing bodily injury to or death of a citizen; or
- h other unlawful acts causing bodily injury or death to a citizen.
The party initiates the consultation and communication between taxpayers and the taxation authorities, the administrative penalties hearing procedure and the tax administrative reconsideration. They do not have to pay fees.
A people’s court charges litigation fees for handling tax administrative cases. The litigation fee is borne by the losing party, or by both parties if they are both held responsible. Generally the litigation fee is 50 yuan. No litigation fee is involved in criminal tax procedures and administrative tax compensation cases.
VII ALTERNATIVE DISPUTE RESOLUTION
Under Chinese tax law, there is currently no tax advance ruling system or tax arbitration system. Negotiation in advance of transactions between taxpayers and taxation authorities is informal and not legally binding on taxation authorities.
Mediation and reconciliation are only applied to a tax administrative reconsideration, a tax administrative compensation litigation and the tax administrative agency’s exercise of its discretionary power. In tax dispute resolution procedures before litigation, tax authorities may or may not accept taxpayers’ arguments against their administrative decisions or the administrative penalty. In tax administrative litigation procedures, taxation authorities may also accept taxpayers’ arguments and change their former specific administrative acts. Even though taxpayers and taxation authorities reach agreement on related tax matters, these agreements require the taxation authorities to conduct specific administrative acts to confirm their legal effect. Thus, they are qualified to bind taxpayers and taxation authorities.
The anti-tax avoidance system in China obtains its source of law in the Enterprise Income Tax Law of the People’s Republic of China, and there is no anti-tax avoidance rule in the Individual Income Tax Law of the People’s Republic of China. In the Enterprise Income Tax Law of the People’s Republic of China and its implementation regulations, there are specific provisions for taxation authorities to affirm enterprises’ tax avoidance, such as transfer pricing, thin capitalisation and controlled foreign enterprises, and to adjust the tax amount. In addition, there is one general anti-tax avoidance rule in the Enterprise Income Tax Law of the People’s Republic of China, which is a rule of principle. In 2015, with the State Administration of Taxation issued Measures for the Administration of General Anti-Tax Avoidance (for Trail Implementation), China’s anti-tax avoidance system became more comprehensive.
The anti-tax avoidance system in China consists of three parts: the special tax adjustment system, the anti-abuse of taxation agreements system and the general anti-tax avoidance system.
The special tax adjustment system’s sources of law include the Enterprise Income Tax Law of the People’s Republic of China, the Regulation on the Implementation of the Enterprise Income Tax Law of the People’s Republic of China and Measures for the Implementation of Special Tax Adjustments (Trial). Its investigation and adjustment objects are tax avoidance schemes between affiliated enterprises such as transfer pricing, thin capitalisation, cost amortisation and controlled foreign enterprises. According to relevant regulations, enterprises that have associated transactions shall prepare, preserve and submit the materials for the time periods of the associated transactions.
In the investigation procedure, enterprises that are seen as suspects of tax avoidance through associated transactions have to take half of the responsibility of the burden of proof. Based on the materials submitted by enterprises, the taxation authorities decide whether to establish a case. After a case is established, the taxation authorities need to serve the companies with a notice on tax-related matters. Through the investigation procedure, the taxation authorities are empowered to require enterprises to provide relevant documents, to collect evidence from enterprises and to carry out an onsite investigation. After the investigation, the taxation authorities examine all the materials and choose the specified method to analyse and evaluate whether associated transactions comply with the arm’s-length principle. Where the investigation results show that transactions between associated enterprises comply with the arm’s-length principle, the taxation authorities make their conclusion and serve the ‘notification of special tax investigation conclusion’ to the concerned enterprises. When the investigation results suggest that transactions between associated enterprises do not comply with the arm’s-length principle, resulting in the reduction of their incomes or taxable income, the taxation authorities draft a preliminary special tax adjustment plan, and negotiations between enterprises and taxation authorities shall be conducted according to the preliminary adjustment plan.
Where an enterprise disagrees with the preliminary adjustment plan, the enterprise shall provide further related information within the time period prescribed by the relevant taxation authority, and the taxation authority shall review the further information, make a review decision in a timely manner and serve the ‘notice on preliminary adjustment plan of special tax investigation’ to the enterprises concerned. Where an enterprise disagrees with the preliminary adjustment opinions stated in the notice, it files such disagreement in writing with the relevant taxation authority within seven days of receipt of the notice, while the taxation authority reviews and holds negotiations again upon the receipt thereof. The taxation authorities confirm the final adjustment plan and serve the ‘notice on special taxation investigation adjustment’ on the concerned enterprise. After receiving the ‘notice on special taxation investigation adjustment’, an enterprise pays the taxes and interest due within specified time limits. If an enterprise still disagrees with the notice, it is allowed to apply for administrative reconsideration and, after the administrative reconsideration procedure, it is allowed to litigate a lawsuit.
The general anti-tax avoidance system’s sources of law include the Enterprise Income Tax Law of the People’s Republic of China, the Regulations on the Implementation of the Enterprise Income Tax Law of the People’s Republic of China and Measures for the Administration of General Anti-Tax Avoidance (for Trail Implementation). Its investigation and adjustment objects are tax avoidance schemes except for transfer pricing, thin capitalisation, cost amortisation and controlled foreign enterprises. The tax avoidance scheme has the following characteristics: the sole or main purpose is to obtain a tax benefit; and the tax benefit is obtained by using an arrangement whose form is permitted in accordance with the tax rules, but is not consistent with its economic substance.
According to the principle of substance over form, tax authorities make special tax adjustments by reference to other similar arrangements with reasonable commercial purpose and economic substance. Adjustment methods include:
- a redefining the nature of all or part of the transactions arranged;
- b denying the existence of transaction parties in tax collection, or treating such transaction parties and other transaction parties as the same entities;
- c redefining the nature of or redistributing among all transaction parities the relevant income, deductions, tax preferences, and overseas tax credits, among others; and
- d other reasonable methods.
The general anti-tax avoidance system’s investigation procedure, disagreement procedure and adjustment procedure are similar to those of the special tax adjustment system.
Nowadays, with the promotion of international cooperation on anti-tax avoidance and domestic taxation’s deep pressure resulting from the slowdown of the worldwide economic conditions, the government is stepping up efforts to investigate and adjust tax avoidance. Because of the not-yet-perfect anti-tax avoidance system, the number of tax disputes on anti-tax avoidance is increasing fast, and enterprises that conduct tax avoidance schemes are facing more and more tax risks. Thus, in China, tax lawyers are playing a much more important role in enterprises’ tax planning.
IX DOUBLE TAXATION TREATIES (DTTs)
By the end of March 2014, the government had officially signed 101 DTTs and arrangements. DTTs have a positive role on the avoidance of double taxation. Taking dividends as an example, a non-resident enterprise pays enterprise income tax at a 10 per cent rate on its dividends earned from inside China. DTTs between China and Singapore, Mauritius, etc., reduce the applicable tax rate on non-resident enterprises’ dividends from 10 to 5 or 7 per cent. Therefore, according to certain conditions, non-resident enterprises that earn income from inside China are allowed to apply for relevant treatments under certain DTTs to lower the taxation burden on international income.
On 25 August 2015, the Association for Relations Across the Taiwan Straits and Straits Exchange Foundation officially signed the Agreement Across the Straits for the Avoidance of Double Taxation and Strengthening Taxation Collaboration. This agreement sets up the rules including residents, permanent establishments, income from immoveable property, business profits, dividends, interest, royalties, capital gains and some other taxation collaboration articles. After the legal transformation procedure is complete, this agreement will come into force in the form of a specific regulation in mainland China, as it is in Taiwan.
The government is currently improving the anti-abuse of taxation agreements system, and the Chinese taxation authorities are making more effort to investigate and adjust non-resident enterprises’ abuse of DTTs. This year saw a case about a non-resident enterprise’s abuse of the beneficial owner in a taxation agreement.2 A summary of the case is as follows.
X company is set up in America, and X company invested and set up Y company in Mauritius. Y company invested and set up Z company in Qingdao, China. Z company’s main businesses are international freight and containers. In March 2014, the shareholders’ meeting of Z company made a determination to distribute dividends of 600 million yuan to its single shareholder, Y company. According to the DTT between China and Mauritius and domestic tax law in China, Y company is liable to pay enterprise income tax on its dividends from Z company, and has the right to choose to apply a 5 per cent tax rate regulated in the DTT between China and Mauritius, and Z company is obligated to withhold and remit Y company’s tax after distribution. While Z company collected and remitted Y company’s tax to the Qingdao tax authority, with Y company’s consignation, Z company applied to the Qingdao tax authority for the enjoyment of the DTT between China and Mauritius, which means the application of a 5 per cent tax rate, and remitted Y company’s tax of 30 million yuan. The Qingdao tax authority established the case and investigated Y company, concluded that Y company was not the beneficial owner and refused Y company’s application. Finally, Z company collected and remitted Y company’s tax of 60 million yuan at a 10 per cent tax rate in accordance with domestic tax law in China.
It can be seen through this case that the Chinese taxation authorities attach more importance to non-resident enterprises’ abuse of taxation agreements. Enterprises should pay attention to this kind of tax risk and make sure that they can conform to the compliance requirements when they apply to enjoy the treatments as prescribed in the tax agreements.
The DTTs signed by the government with foreign countries usually enter into force after both sides’ signature. They are seen as part of the domestic tax laws, and they prevail over the domestic tax laws. DTTs often regulate that both of the contracting states are empowered to explain the provisions of the DTTs, and the government has issued departmental regulatory documents to specifically explain and apply the DTTs. For example, there are documents, including the Implementation Measures for the Mutual Agreement Procedure of Tax Treaties, the Administrative Measures for Non-residents to Enjoy the Treatments of Tax Treaties (Trial), the Announcement of the State Administration of Taxation on Relevant Issues Concerning the Terms of Property Income in Tax Treaties and the Notice of the State Administration of Taxation about the Interpretation of the Relevant Articles of the Agreement between China and Singapore for the Avoidance of Double Taxation and the Implementation thereof. Non-resident enterprises should comply with rules regulated by the above documents when they apply to the Chinese taxation authorities to enjoy the treatments as prescribed in tax agreements, and it is suggested that they acquire the help of Chinese tax lawyers.
X AREAS OF FOCUS
i Overall B2V reform
On 24 March 2016, the Ministry of Finance and the State Administration of Taxation jointly released Caishui  No. 36 on the Comprehensive Roll-out of the Replacing Business Tax with Value-Added Tax (B2V) Transformation Pilot Programme. Meanwhile, four documents of expansion measures for the B2V Reform were officially released:
- a Measures for Implementing the B2V Pilot Programme;
- b Provisions on Relevant Matters concerning the B2V Pilot Programme;
- c Provisions on the Transitional Policies for the Pilot Program of B2V; and
- d Provisions on the Application of Zero VAT Rate and VAT Exemption Policy to Cross-Border Taxable Activities.
Accordingly, from May 2016, all industries under the business tax regime have been transferred to the VAT regime.
ii B2V reform challenges for the real estate and construction sectors
The key points regarding B2V in these industries include:
- a qualified old construction projects can elect the simplified VAT method;
- b the selling or renting of immoveable property and the construction industry are subject to the general VAT method at a rate of 11 per cent;
- c a real estate development general VAT taxpayer selling an old self-developed real estate project can elect the simplified VAT method;
- d the qualified land acquisition price can be deducted from the sales amount;
- e taxpayers can claim input VAT credit on VAT incurred on the purchase of immoveable property with valid invoices; and
- f pilot taxpayers providing overseas construction services are eligible for a VAT exemption.
Taxpayers in the real estate and construction industry should pay attention to the impact of the B2V reform and focus on the following two areas:
- a Preventing tax risk. Pilot taxpayers should make sure that they will be in compliance with the tax rules after the B2V reform. Compared with the relatively simple business tax business tax, the administration of VAT is much stricter. In some aspects, such as day-to-day matters, tax return filings and special VAT invoices, the administration requirement of the tax authorities are more complicated.
- b Monitoring the reduction of the tax burden. VAT will have an impact on the income statement through items such as revenue, cost, expenses, taxes, etc. The accounting method of tax-price separation will also affect the corporate income tax, land appreciation tax, etc. Taxpayers should make full use of the policy, as far as reasonably possible, to monitor the reduction in the tax burden.
iii B2V reform brings the financial service sector into the VAT chain
The key points regarding B2V in the financial service sector include:
- a the tax rate is 6 per cent;
- b input VAT on lending services received by the borrower (interest cost) cannot be creditable;
- c the taxable sales amount of each trading transaction of financial products will be the balance of the sales price less the purchase cost;
- d the previous business tax preferential policies for the financial service sector will be largely retained; and
- e certain specific cross-border financial services provided by pilot taxpayers will be entitled to the export VAT exemption treatment.
Taxpayers in the financial service sector should pay attention to the impact of the B2V reform and focus on the following two areas:
- a Preventing tax risk. It is critical for taxpayers to upgrade or revamp their IT systems within a short time frame to make sure that the accounting results and statements are correct. From the perspective of issuing VAT invoices, financial service taxpayers with massive business volumes should make sure that VAT invoices can be timely issued according to the VAT rules.
- b Monitoring the reduction of the tax burden. The applicability of preferential tax policies, the timing of the purchasing of assets and the business cycle of the enterprise will have an impact on the VAT burden. Pilot taxpayers should make full use of the policy, as far as reasonably possible, to monitor the reduction of the tax burden and fully consider the impact to all taxes and surcharges in estimating the changes in the overall tax burden to evaluate the overall impact of the B2V reform on the business operation.
iv B2V reform levies VAT on consumer services
The key points of B2V in the consumer services sector include:
- a the consumer services industry is subject to the general VAT method at a rate of 6 per cent;
- b input VAT for catering services, resident daily services and entertainment services is not creditable;
- c preferential treatments for the consumer services industry under the business tax regime are mostly retained;
- d VAT pilot taxpayers providing tourism services are taxed on a net basis; and
- e VAT pilot taxpayers providing cultural and sports services, education and medical services, and tourism services outside China are eligible for the VAT exemption treatments for exported services.
Taxpayers in the consumer services sector should pay attention to the impact of the B2V reform and focus on the following two areas:
- a Preventing tax risk. As compared with the relatively simple business tax administration, the administration of VAT is much stricter. Regarding some aspects, such as day-to-day matters, tax return filings and special VAT invoices, the administration requirements of the tax authorities are more complicated. Pilot taxpayers should pay more attention to risks relating to revenue recognition, input VAT credit and invoice management, and establish a sound tax internal control system to make sure the tax rules are fully complied with.
- b Monitoring the reduction of the tax burden. For taxpayers in consumer services, the applicability of tax-preferential treatment, the timing of the purchase of assets and the business cycle of the enterprise can easily influence the VAT burden. Taxpayers should make full use of the policy, as far as reasonably possible, to monitor the reduction in the tax burden. They should also fully consider the impact to all taxes and surcharges such as corporate income tax, urban construction and maintenance tax and the education surcharge, in estimating the changes in the total tax burden to understand the overall impact of the B2V reform on operational outcomes.
XI OUTLOOK AND CONCLUSIONS
In China, there are many methods of tax dispute resolution, including negotiations between enterprises and taxation authorities, administrative tax penalty hearings, administrative tax reconsiderations, administrative tax litigation and criminal tax procedures. However, in practice, most tax disputes are solved through negotiations between enterprises and the taxation authorities. On one hand, this kind of resolution avoids complex legal procedures; on the other, it contributes to maintaining a good relationship between taxpayers and the taxation authorities. In the future, with the reinforcement of Chinese taxpayers’ legal awareness and the promotion of governing taxation according to law, there will be more and more administrative tax reconsideration cases and administrative tax litigation cases.
Regarding the avoidance of double taxation and anti-tax avoidance, the Chinese taxation authorities are making efforts to enhance the capacity of tax law enforcement and to try to keep the tax rules consistent with international practices. Enterprises’ tax avoidance schemes are facing more and more tax law risks in China, and there will be more and more tax disputes and cases in this area.