Tax Health Check: A "Firewall" Against Tax Risks

Currently, the “Golden Tax (phase IV)” system employed by tax authorities can perform real-time cross-checking of a company’s financial flows, invoice data, and logistics information. It also performs horizontal and vertical comparison and analysis of various financial data indicators. Any irregularities may trigger automatic alert. This means that tax issues once overlooked due to lack of data transparency are now more likely than ever to be swiftly detected and audited.

Once a company receives a risk reminder or even an audit notice from the tax authorities, it is often under immense time pressure and may not even be able to prepare all the relevant supporting documents to address the challenges from the tax authorities before the stipulated deadline. If the company fails to provide reasonable explanations and relevant evidence in a timely manner, it will not only be required to pay the outstanding taxes and a late payment penalty of 0.05 percent per day but may also face administrative fines ranging from 0.5 to 5 times the unpaid tax amount. Moreover, this will negatively impact the company’s tax credit rating. A downgraded tax credit rating can lead to more frequent and stringent tax audits and adversely affect various aspects of business operations, such as eligibility for tax incentives (e.g., China HNTE status), applications for government subsidies, financing costs, and bidding for government projects. Additionally, certain actions by the company could even be classified by the tax authorities as severe tax violations, such as issuing false VAT invoices for others, fraudulently obtaining tax refunds for exports, or providing false information to obtain tax benefits. Such allegations often require relatively low thresholds of involvement (e.g., RMB 500,000 in tax-related matters) to result in criminal liability for directly responsible managers and other personnel.

Therefore, we recommend that the company's management consider conducting a systematic and comprehensive review of its tax compliance and reporting processes as soon as possible. This involves examining current operational practices, assessing adherence to applicable tax regulations, identifying potential risk areas, making timely adjustments for non-compliance issues, as well as ensuring the proper filing of supporting documents. Additionally, during the health check, the company may explore whether adjustments to its business model could help minimize its tax burden while maintaining compliance. This proactive approach will help the company detect and mitigate relevant tax risks before they escalate, thereby reducing the risks for both the company and its responsible persons.

A tax health check is not merely a “diagnosis” of your current tax situation but also a proactive measure to mitigate potential risks. By conducting a comprehensive review of the tax status, companies can not only avoid unnecessary losses but also optimize financial management, laying a solid foundation for long-term growth. We recommend that companies review their tax position regularly and proactively conduct a tax health check in the current increasingly challenging compliance environment, and seek assistance from tax professionals, if needed.