Editor: Tongyu Zhang
On April 16, 2016, China’s State Administration of Taxation (SAT) published amended measures to what is known as the blacklist system against tax illegalities. The amended measures, which came into effect on June 1, 2016, add a credit repair mechanism to the original system. The SAT describes the structure of the update as ‘one body and two wings,’ where ‘one body’ represents the tax credit system and the ‘two wings’ refer to the disclosure of information system, and the joint punishment and administration imposed by relevant authorities and institutions.
Under the revised measure, the following tax-related offenses will be made public:
- Tax evasion;
- Evading tax arrears;
- Filing a false export declaration to obtain a tax refund for exports;
- Refusing to pay taxes by means of violence or threat;
- Falsely making out special invoices for value-added tax (VAT) or other invoices to defraud a tax refund;
- Falsely issuing plain invoices to a certain amount;
- Falsifying invoices, anti-fake articles, or supervisory seals; and
- Other serious violation circumstances, which cause significant social impact.
Information disclosure system
The name of the offender, their social credit code or taxpayer identification number, registered address, and the personal information (name, sex, ID number) of their legal representative, directly liable financial staff or the liable person, will be entered in the information disclosure system for the above-stated serious tax-related offense cases. Details of the case, including the violation, relevant legal references, authorities conducting the inspection, related disposal and penalties information, and the specialized tax-related service agency involved, will also be filed. Such information will be disclosed through the provincial level taxation authorities’ website, and may be made public via the online bulletin board of tax authorities of the relevant level, and through newspapers, radio, TV, internet media, and press conferences.
If a company with serious tax-related violations changes legal representatives or executives after an infraction has been posted, the taxation authorities will disclose the new information to the public as an addition to the existing filings; the original facts, including those involved at the time of the violation, will not be changed.
Credit repair mechanism
A credit repair mechanism is now available that allows offenders to be removed from the blacklist and regain their integrity and reputation if certain conditions are met. If parties involved in a tax-related offense case can fully pay the taxes in arrears and pay overdue fines and other required fines, the case information will be entered only into the information disclosure system rather than to the public. If the case information has already been disclosed, the publicity may be ceased and the information removed from the bulletin board contingent upon approval by taxation authorities. Relevant authorities that impose joint punishment and administration will be notified of decisions made by the taxation authorities. The information will be removed from the bulletin board when the period of publication exceeds two years. However, once a violation is filed, the case information will be kept permanently as part of the tax payment credit record.
Penalties for tax offenses
Under the SAT, the violator’s tax payment credit level will automatically be rated Level D, and the administrative measures for such taxpayers will be applied. Taxation authorities may then provide the information to the relevant departments participating in joint punishment and administration.
Other measures of joint punishment include:
- Prohibition from leaving China;
- Restriction from assuming certain positions in a market entity;
- Reference for credit rating for financing by financial institutions;
- Prohibition from purchasing certain commodities and services such as luxury goods;
- Disclosure of the information via the National Enterprise Credit Information Publicity System;
- Restriction from obtaining land supplied by the government;
- Prohibition from participating in governmental procurements;
- Ineligibility to management of Customs-certified companies;
- Restriction from some operations in securities and insurance market;
- Prohibition from the transfer of rights and interests of toll roads;
- Restriction of governmental funds support;
- Restriction from issuing corporate bonds;
- Restriction from applying for import quotas of agricultural products; and
- Publishing information through major news websites.
The range and content of the joint punishment for taxation blacklist may be extended to measures beyond this list. Taxation authorities often extend restrictions to real estate, travelling, starred-hotels, and other high consumption sectors. Some related professional associations will also be involved in the joint action, such as the Chinese Institution of Certified Public Accountants and the China Certified Tax Agents Association, as well as the State Administration of Foreign Exchange.
The taxation blacklist system can be seen as part of the establishment of a Social Credit System, which has been proposed by the State Council. The framework aims to enhance the establishment and application of online sharing systems to promote a credit-information sharing platform across regions, sectors, and departments. In a recently released guideline promoting the social credit system, the State Council emphasized public resources, services, and business opportunities will be offered first to market entities with good credit. These measures indicate the government’s determination to create an effective credit mechanism in which taxation credit plays a critical role.
Foreign companies and investors should be aware of these regulatory trends and respond accordingly. With an increasing cost for taxation violations, more attention should be paid to internal management and controls to prevent potential risks. As the taxation credit system is in a gradually evolving process, foreign taxpayers should make efforts to improve communication with local taxation authorities. Also, in the context of China’s broader taxation system reform, foreign taxpayers should keep up to date with the latest regulation changes to ensure compliance.
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