By Hengka (Henry) JI, Partner, and Zihan Zhang, Associate, Zhong Lun Law Firm, Beijing
On January 26, the deputy director of China’s State Administration of Taxation (SAT) announced that tax authorities across China will begin to rely more on big-data analytic resources to detect tax evasion by big businesses and individuals. The government will use the data to target tax evasion, ensure taxpayer compliance, and eventually, achieve the common prosperity goal.
The announcement indicates China is gradually entering a new era of managing tax through bigdata and intends to tighten tax administration in the foreseeable future. Multinationals with operations in China should consider this for tax compliance and planning.
To what does China’s `tax big-data’ refer?
China’s “tax bigdata” has a large capacity and a rich variety, including—but not limited to—all taxpayers’ basic information, historic operational and market transaction data, and data generated in the process of tax law enforcement, such as historical tax violations and corrections.
Generally, the main resources of China’s tax bigdata include the various tax declaration and management systems of tax authorities and their authorized agencies. One typical example is the Golden Tax System (GTS) Phase III, the existing version of the nationwide value-added tax (VAT) administration and monitoring system. On September 15, 2021, China officially launched the construction of GTS Phase IV to upgrade the GTS and collect more tax data from even more sources.
China’s tax bigdata also comes from the country’s intergovernmental agencies, international financial institutions, and organizations through information-sharing public online data such as information companies disclose, according to applicant law.
The role China’s tax bigdata plays in avoiding tax evasion
China’s tax bigdata enables tax authorities to carry out categorized and precise tax supervision on various types of tax evasion. This marks a significant advantage and breakthrough in managing tax through bigdata compared with managing tax through old-fashion invoices (so-called “Fapiao”).
The constantly updated tax bigdata’s strong analytical capability makes it possible for tax authorities to automatically identify abnormal data and become aware of tax risks. Tax authorities will be able to compare and validate the authenticity of the historical tax data submitted via bank accounts, account data of upstream and downstream companies and revenues, as well as through costs and profits in the same industry.
Tax bigdata can retrospectively provide tax authorities with important clues from abnormal data for targeted inspections, and it can collect evidence based on accurate and traceable data at the same time.
Impacts of China’s tax bigdata on multinationals with operations in China
The application of China’s tax bigdata is bound to increase the tax transparency of multinationals operating in China. For example, tax authorities will be aware of every single ticket issued or received and whether or not every invoice has been entered into a taxpayer’s account. To some extent, it’s reasonable to say that multinationals will no longer have tax secrets in China. Consequently, tax evasion will be easier to detect going forward. As for historical tax issues, by introducing tax bigdata analysis, more tax queries and inspections will need to be addressed. Multinationals may encounter severe administrative penalties, or even criminal liabilities, in addition to the required payment of overdue taxes and fines.
SAT will focus on China-based companies from seven high-risk fields and three types of tax evasions. Multinational companies should expect strong and continuous supervision. The seven targeted fields include the production and processing of agricultural and sideline products; the acquisition and utilization of waste materials; the purchase and sale of bulk commodities, such as coal, steel, electrolytic copper and gold; for-profit educational institutions; medical cosmetology; live-streaming platforms; and intermediaries.
The three types of tax evasion under the spotlight include shell companies, fake exports, and false declarations of income. They are frequently presented as enterprises issuing false VAT invoices, concealing income, listing costs falsely, obtaining tax benefits by cheating, and conducting aggressive tax planning using related-party transactions.
Tax bigdata successfully assisted tax authorities last year in investigating and exposing a slew of tax cases in the above-mentioned fields, demonstrating China’s attitude of zero-tolerance for tax evasion.
How multinationals can survive the challenges from tax big-data
Although the SAT will need time to upgrade the tax administration through tax bigdata, it is never too early for multinationals with China operations to take measures to cope with this new era of inspection. It is also necessary to conduct self-examination to promptly discover and correct potential historical and ongoing tax violations, especially in relation to shell companies, fake exports, and false declarations of income. Multinationals also would be wise to strengthen communications with the competent tax authorities to better fix existing tax issues.
Furthermore, multinationals should get a better balance between tax compliance and tax planning, as well as revisit and control various tax risks and make a long-term plan.
Lastly, given the recent trend on tax bigdata, internal tax compliance should be the top priority for multinationals to prepare for future tax inspections and to avoid administrative or criminal tax liabilities.
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Hengka (Henry) JI is a partner and Zihan Zhang is an associate with Zhong Lun Law Firm in Beijing.
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