Taxpayer Credit Rating and Restoration

There is an old Chinese proverb saying that one who is not creditable cannot reach an inch further. Since 2014, the State Administration of Taxation (SAT) has issued several circulars to establish and regulate the taxpayer credit rating system in China, covering essential practical aspects such as information collection and evaluation, credit rating determination, release and application, dispute handling, credit repair etc., which has now evolved into a sophisticated administration system easy for both the tax authorities and the taxpayers to understand and implement.

Viewing that the circulars related to taxpayer credit rating system have undergone several amendments and are quite complicated, this article is aimed at drawing attention of relevant enterprises operating in China by summarizing the most important aspects of the current system after revision.

Taxpayer Credit Rating Types and Relevant Administrative Measures

Taxpayer credit rating includes four levels: A, B, C and D:

• For taxpayer with level A, tax authority will grant credit-keeping incentives;
• For taxpayer with level B, tax authority will implement normal administration measures, provide timely guidance on tax policies and regulations and selectively grant incentives based on the trend of the taxpayer’s credit rating status;
• For taxpayer with level C, tax authority will take strict administration adhering to law and selectively adopt disciplinary measures based on the trend of the taxpayer’s credit rating status;
• For taxpayer with level D, tax authority and other relevant authorities will take punitive measures and the daily operation will be under intensified control and restrict.

Evaluation and Restoration Mechanism

The tax authority will evaluate taxpayers based on their historical credit information, internal taxation information and external data, among which the internal taxation information is particularly important, including regular indicator information (tax-related declaration, tax payment, invoices and tax-control equipment, registration and account books etc.) and non-regular indicator information (tax inspection/tax audit etc.).

As the taxpayer credit rating is under dynamic management, according to SAT Public Notice 2021 No. 31, it can be recovered under certain conditions. For demerit scores due to discredit, tax authorities provide criteria and extra scores for credit restoration for correction within 30 days, correction after 30 days within the current year and correction after 30 days within the following year.

Especially for taxpayers who are classified as Level D under most severe supervision, it is an effective measure for the tax authorities to encourage them to actively correct the misbehaviors. For example, the credit rating can be repaired, when:

• A taxpayer, who has previously failed to make tax declaration, tax payment or record filing within the statutory deadline, has already made up for it;
• A taxpayer, who has not made payment or full payment of taxes, late payment charges and penalties pursuant to the conclusion of the tax authorities without constituting a tax-related criminal offence and was directly classified as Type D taxpayer, has now paid or made up payment within 60 days upon the expiry of the deadline specified in the conclusions of the tax authorities;
• A taxpayer, who has been directly categorized as Type D taxpayer due to serious dishonest acts, has corrected tax breaches, fulfilled tax obligations and has no record of such dishonest acts for 12 consecutive months prior to application of credit rating restoration;
• A taxpayer, who was directly categorized as Type D taxpayer last year and remains the same credit rating status in the current year, has already corrected tax breaches and fulfilled tax obligations; or the information disclosure of the dishonest party has been withheld or ceased to be published according to SAT and the taxpayer has no record of such dishonest acts for 12 consecutive months prior to application of credit rating restoration.

Our Views

Credit rating management for taxpayers is one of the most important administration regulations implemented by Chinese tax authorities in recent years. It not serves all corporate taxpayers in terms of self-reflection and motivation, but also provides efficient guidelines for the tax authorities to allocate supervisory and service resources rationally.

We recommend taxpayers to learn about the mechanism and basic rules of the tax credit rating system in China, keep track of to their tax credit rating status and maintain a high-level compliance with the operational requirements related to tax credit rating.