China issued an amended set of laws on tax administration and collection on May 1 this year, the first revisions in more than five years. The new law provides a framework to allow the tax authorities more access to taxpayer information and better defines the rights and responsibilities of both tax officers and tax-payers.
With the rapid change in China's business environment, anticipation of World Trade Organisation accession and an increasing awareness of the tax system, there was a desperate need to revise the relatively primitive law on tax administrative and collection. The number of articles in the new law is 94 compared with 62 in the old law, reflecting a significant number of changes. Discussed below are some of the more prominent changes that impact most taxpayers.
One of the most important changes to the tax administration and collection system in the internet age is the exchange of information between tax authorities and other government departments. In the past, the tax authorities were only able to monitor companies that had registered with them. This meant that all companies that had obtained their business licence from the State Administration of Industries and Commerce (SAIC) but did not perform the mandatory tax registration, would be outside the radar screen of the tax authorities. The new law requires the SAIC to inform the tax authorities on new registrations so as to eliminate this loophole.
In addition to receiving regular information from the SAIC, the tax authorities are also provided with the authority to obtain relevant information on the taxpayer from any related parties during a tax investigation. These related parties are obliged to provide the tax authorities with the requested information, as opposed to only providing support and assistance as required under the old law. This has expanded the power of the tax authorities in gathering information.
The new law requires taxpayers to pro-vide tax authorities with all bank account information, while banks are required to keep track of the taxpayers' tax registration numbers with their respective accounts. By doing so, the tax authorities are able to obtain access to taxpayers' bank accounts or even freeze the bank accounts on balances equivalent to the overdue taxes. Penalties will be imposed on banks that do not comply.
Cost of non-compliance
There are a number of new articles in the new law that set out clearly the consequences of non-compliance. Most of them are more severe than the old law. However, there is one change that is welcomed by taxpayers. In the past, late payment interest on overdue taxes was computed at 0.2 percent per day simple interest, which is equivalent to an astounding 73 percent a year. With such an enormous charge, taxpayers are reluctant to perform voluntary disclosure on unpaid or underpaid taxes as late payment interests would be equal to the unpaid or underpaid taxes in less than 18 months of delay. Under the new law, late payment interest is reduced by 75 percent to 0.05 percent simple interest per day, which is equivalent to 18.25 percent a year. It is still relatively high but at least a lot more reasonable than it was.
Other changes are harder on taxpayers:
The Administrative Bureau of Industries and Commerce can cancel a business licence upon request from the tax authorities if the taxpayer declines to perform tax registration. As a result, a company that does not perform tax registration may have to go through again the entire process in establishing the company. For tax evasion and `rebellion' against tax collection, the penalty clauses have been changed from not more than five times of the tax involved to a range of above 50 percent to less than five times of the tax involved. The penalty is in addition to the tax payable. In the past, the tax authorities occasionally chose to waive the penalty due to the enormous late payment interest. With the introduction of the new law, there is a minimum penalty amount of at least 50 percent of the tax involved.
One of the more significant additions to the new law is the one where an expatriate legal representative of a corporate taxpayer with unsettled tax and late payment interests may not be allowed to leave China. The old law did not specifically provide for the legal representative to be held responsible for a company's taxation matters, although the Criminal Law provides for the legal representative to be sentenced to up to three years of imprisonment for gross violation of the tax laws.
There are several additional articles on withholding agents. The new law permits the tax authorities to enter the premises of the withholding agent and audit its records. During the course of an audit, parties related to the withholding agent are obliged to provide the tax authorities with information as requested.
Withholding agents who do not remit all of the tax withheld to the tax authorities are subject to a penalty ranging from more than 50 percent to less than three times of the tax involved. Under the old law, the penalty ranges depended on the absolute amount of the tax not paid or underpaid and also on the percentage of the actual tax. In view of this, payers in China must pay closer attention to payments where they have withholding obligations and where the agreements with the payees are for them to receive amounts net of withholding tax. This means that the payer will bear the applicable withholding tax and the tax authorities would deem the tax to have been withheld from the payment. Payments subject to withholding obligations include payments made to foreign companies and foreign individuals, and also payments made to individuals domiciled in China.
While the new law provides the tax authorities with more power and channels to investigate taxpayers, it also provides additional rights to taxpayers. Although these articles may be taken for granted in international practice, they represent major improvements in China's taxation system. Changes include:
-Taxpayers' accommodation and necessities needed by the taxpayers and their dependants may not be confiscated for the purpose of settling unpaid taxes. This demonstrates the rise in awareness of human rights in mainland China.
-Taxpayers are entitled to a complete refund together with interest on any tax over-payment. In the past, obtaining refund from tax authorities was an immense hassle and interest would never have been considered.
-Taxpayers may lodge their appeals to the tax authorities directly to the people's court without going through other government authorities as required by the old law. This provides a much quicker channel for taxpayers to report any unjust cases. Previously, taxpayers had great difficulty in appealing against the tax authority's assessment due to red tape.
-In order to ensure taxpayers are really protected, the new law stipulates that tax officers will be subject to administrative punishment or even criminal charges if there is retaliation to taxpayers who have reported fault by tax officers. This will definitely enhance the fairness of China's taxation system.
The current Chinese tax system has come a long way since its inception in 1994. From the basic law to the implementing rules and clarification circulars, the tax authorities have attempted to bring more transparency and fairness to the system. This amended tax administration and collection law is yet another step towards this objective. While the changes are not revolutionary, they do tighten formal loopholes and give it more teeth in implementation.
Hopefully, with the ability to better police the payment and collection of taxes, China will be able to bring down its current corporate and individual income tax rates to levels more acceptable to taxpayers, thereby reducing the temptation to avoid taxes.
This article was written by Dawn Foo, partner, and Vincent Pang, manager, of the Beijing office of PricewaterhouseCoopers.
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