Regulating the Administration of the Levy and Collection of Taxes

Border Control

Article 44 of the new law broadens Article 28 of the old law by specifying that the legal representative of a corporate taxpayer will be responsible for the proper settlement of tax liabilities. The provision states that the legal representative will be prevented from leaving China if the amount of tax payable or any late payment charges have not been settled in full and no guarantee has been provided. The full amount of the tax payable and the late payment charges must be paid or a guarantee to honour such obligations must be provided to the taxation authorities before the legal representative can leave the country.

Warnings

In practice, the taxation authorities may notify the border control authorities to bar the legal representative of a taxpayer from leaving the country only if the taxpayer has previously received a ¡°Reminder to Pay Tax¡± issued by the taxation authorities under Article 44 of the new law. For example, if a corporate taxpayer has previously received a ¡°Notice of Reminder to Pay Tax¡± (Notice) but has not paid the tax that is owing to the taxation authority, the legal representative would be barred from leaving the country. However, if there has been no Notice issued by the tax authorities, Article 44 would not be applied.

Maximum Limitations for Tax Assessments

Article 31 of the old law provides that if a taxation authority is responsible for a taxpayer or tax withholding agent failing to pay tax or paying less than the amount payable, or if a taxpayer or tax withholding agent fails to pay tax or pays less than the amount due as a result of mistakes in calculation or other such errors, the taxation authority may pursue payment within a three-year period. The new law has not changed the statutory limitation period for the taxation authorities to pursue unpaid tax. However, the new law permits the taxation authority to collect a surcharge for overdue tax that was owing to mistakes made by the taxpayer or the tax-withholding agent.

Under the law in special circumstances ¨C that is for tax due in excess of Rmb100,000 as a result of mistakes in calculation or other errors made by a taxpayer or tax-withholding agent ¨C the period over which payment could be pursued could be extended to 10 years. However, Article 52 of the new law reduces this period from 10 years to five years.

Article 54 of the PRC Administration of Tax Collection Law Implementing Rules (Implementing Rules) provides criteria for assessing "special circumstances". These Implementing Rules were adopted on August 4 1993 and it is expected that new Implementing Rules will be released in the future.

The new law also provides that cases of tax evasion, refusal to pay tax, and tax fraud are not subject to the above statutory limitations.

Verification Provisions

Article 35 of the new law expands on the verification provisions in Article 23 of the old law. Under the new law, the taxation authority may now verify and inspect tax payments if the tax declaration is grossly deficient without any justification.

Tax Payment Guarantee and Tax Enforcement Provisions

Under the new law, taxpayers with substantial tax liabilities are required to alert the authorities prior to the disposal of any immovable property or any assets of significant value. Notably, the new law provides that if a taxpayer transfers assets in order to deprive the State of tax revenue, the taxpayer will be fined. In addition, Article 55 of the new law strengthens tax administration by allowing a taxation authority to regulate tax payment guarantees or impose tax payment enforcement measures if it suspects a taxpayer of tax evasion.

Interest on Refunds for Overpayment of Tax

Article 51 of the new law supplements Article 30 of the old law by allowing for the payment of interest when refunds are made for overpayment of tax. As with refunds for overpayment, interest on refunds for overpayments is subject to a three-year statutory limitation.

Filing Tax Returns

In order to keep up with advances in technology, Article 26 of the new law has been added to allow for electronic and postal filing of tax returns. Moreover, Article 17 of the old law is narrowed in the new law to allow the taxation authority to grant an extension on the declaration period if a taxpayer is unable to submit a tax declaration. An extension may also be granted to a tax-withholding agent if the agent is unable to report, on schedule, the tax payments withheld and remitted, or collected and remitted on behalf of others.

Filing Extensions

Under the new law, taxpayers who have obtained approval to extend the filing of tax returns should:

(i) pay taxes in advance according to the amount of the last tax period or the amount approved by the taxation authority within the current tax period; and

(ii) settle tax liability within the extended period.

Finally, Article 31 of the new law amends Article 20 of the old law, allowing taxation authorities below county level to grant filing extensions.

Liability and Penalties

Late Payment Penalties Significantly Reduced

Under the old law, if a taxpayer failed to pay taxes or a tax withholding agent failed to hand over taxes within the prescribed period, the taxation authorities were entitled to impose a time limit within which the tax payment obligations had to be fulfilled. In addition, the taxation authorities could impose a daily surcharge for overdue tax payments of 0.2% of the amount of overdue tax (this equates to 73% per annum). Article 32 of the new law significantly lowers the surcharge for overdue tax payments to 0.05% per day (this equates to 18.25% per annum).

Administrative Penalties

According to Article 49 of the old law, administrative penalties were to be determined by taxation bureaux at county level or above. In the case of individual industrial and/or commercial entrepreneurs and individuals engaging in business without first obtaining a business licence, fines of up to Rmb1,000 could be determined by such taxation bureaux.

Article 74 of the new law removes the discretionary power of the taxation bureaux at county level or above to waive any administrative penalties. Instead, the new provision gives the discretionary power to waive administrative penalties below Rmb2,000 to the relevant taxation offices.

Other Provision

Article 60 of the new law stipulates that a fine of up to Rmb2,000, or in serious circumstances, a fine of between Rmb2,000 and Rmb10,000, may be imposed for:

(i) failing to provide all bank account numbers;

(ii) installing, using, damaging or altering tax control equipment without authorization; or

(iii) using tax registration certificates without authorization or transferring, altering, destroying, assigning or falsifying tax registration certificates.

Article 60 of the new law also provides that the business licence of a corporate taxpayer will be suspended if it refuses to register its tax records within the period stipulated by taxation authorities to rectify any default.

Civil and Criminal Tax Evasion

Minimum penalties for tax evasion, setting fines at not less than 50% and not more than five times the amount of tax owed due to non-payment or underpayment are introduced in Article 63 of the new law. Articles 65 of the new law expands the definition of tax evasion to include "refusal to make tax filings upon notice from the taxation authorities".

Criminal tax evasion penalties now fall within Article 201 of the PRC Criminal Law and are handled by the courts. Taxpayers shall be punished with imprisonment or criminal detention of less than three years if they are found guilty of:

(i) forging, altering, concealing, or indiscriminately destroying accounts books, ledgers, or making unsubstantiated expenditures;

(ii) failing to enter or falsely understating income items, or failing to submit tax returns after being notified by the tax authorities, or submitting a false return; or

(iii) failing to pay taxes, paying less, or evading taxes exceeding 10% but less than 30% of payable taxes, or evading taxes again after two administrative sanctions for tax evasion.

For cases with evaded tax amount exceeding 30% of payable taxes, or exceeding Rmb100,000, criminal penalties include imprisonment of over three years but less than seven years.

Civil and Criminal Tax Fraud

Article 66 of the new law unifies penalties for fraudulently gained tax refunds on exports at not less than 100% and not more than five times the amount of tax evaded. In addition, criminal penalties for using false reports or other fraudulent means to defraud State export tax refunds, or falsely issuing exclusive value-added tax invoices include imprisonment or criminal detention as in accordance with Article 204 of the PRC, Criminal Law. For cases involving extraordinarily large amounts, or of an especially serious nature, criminal penalties include imprisonment of over 10 years or life imprisonment.

Civil and Criminal Refusal to Pay Tax

Article 67 of the new law penalizes taxpayers who use violence or threatening means to refuse payment of tax by imposing a fine of not less than 100% and not more than five times of the tax owed. Criminal penalty includes imprisonment or criminal detention of less than three years. For cases of a serious nature, criminal penalties include imprisonment of over three years but less than seven years as in accordance with Article 202 of the PRC, Criminal Law.

Article 69 of the new law introduces penalties to withholding agents, setting fines at not less than 50% and not more than three times the amount of tax owed due to non-withheld or unpaid tax liability.

Audit Procedures

Tax Investigations

Article 58 of the new law now requires officials to show identification and an inspection notice prior to investigation. Article 59 stipulates that a taxpayer may refuse inspection if the officials fail to provide proper identification or the notice.

Information Sharing

Under the new law, disclosure requirements for bank accounts have been strengthened and information sharing has been extended to cover exchanges among banks, taxation authorities and the State Administration for Industry and Commerce (SAIC) and its local offices. Article 17 of the new law states that taxpayers are required to report all bank account numbers to the taxation authorities. Article 15 of the new law expands Article 10 of the old law by strengthening information sharing between the SAIC and its local offices and the taxation authorities. Moreover, Article 33 of the new law requires tax bureaux to report any tax violations to the higher authorities.

Taxpayer Transparency

The new law clarifies the duties of the tax authorities and introduces provisions relating to greater administrative transparency. Article 6 has been added to require "the State to effectively use the latest telecommunication technology to administer taxation and to share data with other authorities." Article 9 to Article 14 of the new law outlines and expands the duties of the tax authorities and their officials. Each tax authority must strengthen its own internal controls.

Conduct of Officials

The new law contains a number of provisions regulating the activities of tax officials. The law imposes an obligation on tax authorities to inform taxpayers of tax regulations. Tax officials are to receive proper training and guidance and must carry out their duties impartially. Officials must not demand or accept bribes, practice favouritism or fraud, neglect their duties, fail to collect or collect less than the amount of tax payable, or abuse their powers.

The new law also expands provisions concerning taxpayer transparency/rights. Article 8 gives taxpayers the right to:

(i) request information on tax regulations;

(ii) enjoy confidentiality;

(iii) apply for tax refunds and exemptions;

(iv) request appeal decisions;

(v) sue tax authorities and officials for misconduct; and

(vi) examine tax laws anonymously.

Miscellaneous

Article 21 of the new law is expanded to give tax authorities the exclusive power to print, store, and manage tax vouchers.

The new law also provides for tax settlement involving corporate mergers and divisions. Article 48 states that if a company has any outstanding tax liabilities before a merger or division, the post-merger company or the company formed after the spin-off shall be responsible for the payment of any outstanding amounts.

The new law introduces a provision that allows the tax authorities to cancel any non-arm's-length transaction or determinean arm's-length value for the taxpayers. In practice, the tax authority has yet to implement such a provision. It is likely that further guidance would be provided in the coming Implementing Rules for the new law.

Positive Development

In general, the new law should be perceived as a positive development by foreign investors, particularly with the significant reduction of the late payment penalty from 73% per annum to 18.25% per annum. In addition, the rights of foreign investors are better protected with the introduction of provisions that increase administrative transparency and the regulation of the conduct of tax officials. However, certain provisions of the new law will make things more difficult for foreign investors. For example, the provision enabling the tax authority to hold legal representatives at the border has been broadened, and the tax authorities now have the power to cancel certain non-arm's-length transactions.