China: Tax Inspection – Optimal Preparation during crises

As last year, the tax inspection will take various factors into consideration such as the volume of tax payment, industry, location, entity type etc. based on a list of key tax source companies. The focus of the tax inspection is the companies with abnormal tax declaration status in the Golden Tax System, low tax credit grade or high tax risks. The inspection will cover the tax compliance status of the target for FY2017 to 2019. If any serious tax violation is identified, the inspection period can be retrospectively extended to the previous year or even to FY2020. The inspection will combine the guideline and the key points, and the randomly selected companies could be directly inspected or asked to perform a self-examination prior to the official inspection.

According to the announced inspection plan, the key points and the scope of tax inspection will not be affected by the current economic climate, which is assessed essentially unchanged as in FY2019. In principal, companies selected as tax inspection targets in 2019 will not be included in the sample check for tax inspection 2020.

The Golden Tax System in China is constantly developing and designed to effectively monitor  the companies to fulfill the compliance requirements in tax declaration and import the data collected by the tax authorities into the big data system.

Taxpayers are required to comply with the relevant rules when filing a tax return, especially in cases where companies continuously file a zero turnover tax return or are subject to abnormal tax burdens. Companies falling into this category should perform a self-assessment by considering their own business substance to prepare for the tax inspection.

As in the last tax inspection, the key points of the inspection remain the fight against tax evasion by falsely issuing VAT invoice and cheating on export refund. Even if the company is not a taxpayer, its tax liability as a withholding agent also falls within the scope of the inspection.

Therefore, we recommend that all companies, but especially who enjoying tax benefits such as but not limited to High New Technology Enterprise, super deduction for research and development or one-off depreciation of fixed assets etc. to perform a corresponding compliance check for FY2017 to 2019 prior to the tax inspection and to prepare a complete compliance documentation.

In order to be best prepared for a possible inspection, it is essential to integrate an appropriate compliance system in the company. Documentation and adherence to compliance regulations not only becomes relevant in the event of a tax inspection, but also facilitates effective and efficient cooperation with the Chinese authorities and external service providers. 

With our Compliance Health Check, we would like to provide you with a tool that identifies the risks and opportunities and could advise you comprehensively on all compliance issues, both in China and other Asian countries.

In addition to preparing compliance documentation, we recommend that companies reach the threshold for related-party transactions shall prepare appropriate Contemporaneous Documentation for FY2019 by the end of June 2020. Especially companies with complex structures or relatively aggressive arrangements on corresponding transactions or with a significant amount of non-trade payments to related parties are more likely to be selected as key inspection targets. In case of a tax inspection, such companies should promptly review the transfer pricing documentation FY2017 to 2019 and ensure a close communication with their headquarter.