China tax – big data and beyond
Enhanced use of tax technology by the Chinese tax authorities, more sophisticated targeting of taxpayers, and heightened engagement between China and overseas tax authorities are the focus of this article by Tracy Zhang, Marianne Dong, David Ling and Karmen Yeung.
In May 2016, the Chinese State Administration of Taxation (SAT) hosted the 10th plenary meeting of the OECD Forum on Tax Administration (FTA) in Beijing. At this event, the tax commissioners of 44 tax authorities from the leading global economies came together to share best practices in relation to tax administrative practices. As the host, the SAT took the opportunity to provide a detailed explanation on the strides that China has made in recent years in upgrading its tax administration and, indeed, the SAT had a great deal to tell.
As discussed in last year's China Looking – Ahead in the chapter, New challenges to tax risk management in China, advances are being made on many fronts in relation to Chinese tax administration. This includes, among many other changes, improved tax rule-making processes, new arrangements for collaboration between state tax bureaus (STBs) and local tax bureaus (LTBs), and new tax administrative processes that replace cumbersome tax pre-approvals with data-driven, follow-up tax audit procedures.
These measures to enhance taxpayer certainty, improve the usage of tax authority resources, and ensure better tax compliance are being driven by massive investment in technology. For example, the radical China VAT reform of 2016 would have been inconceivable without the real-time information collection, cross-checking and sharing permitted by the Golden Tax Project III and the new VAT Invoice Processing System. The drive being made to get taxpayers to conduct all their interactions with the tax authorities through the internet, apart from decreasing compliance costs and limiting opportunities for corruption, also provides the electronic data 'fuel' for ramped-up big data analysis for tax audit targeting and for taxpayer risk rating. More "fuel" will come on tap shortly, with the activation of China's new arrangements for the international automatic exchange of tax information (AEOI) under the OECD's common reporting standard (CRS).
This chapter will clarify how the SAT has moved quickly in 2016 to consolidate the improvements arising from the numerous tax administrative reforms undertaken in 2015, which were detailed in last year's chapter. It will look at the initiatives likely to have a major impact in 2017 and beyond, and the implications for taxpayers.
Building on 2015 developments towards greater tax certainty
Last year's chapter explained, in detail, how the SAT had made great efforts to improve the clarity of the tax law and the consistency of tax enforcement. These efforts continued in 2016.
Ever-increasing numbers of enforcement cases are being publicised through tax authority information platforms, in particular through the WeChat mobile messaging. This grants taxpayers and advisers an enhanced view of the types of tax issues being focused on by the authorities, and clarifies how information exchange and big data analysis are increasingly driving case identification. Continuing the trend observed in last year's chapter, guidance on new tax regulations is becoming ever more detailed and the SAT response time to emerging issues is becoming quicker. The manner and speed with which detailed and voluminous VAT guidance was issued in the wake of the May 2016 VAT reforms is testament to this. At the national level alone, 33 SAT Circulars have been issued between May and October 2016 to clarify specific VAT reform matters, with many more issued at the provincial and local levels.
A highly significant new development, with major implications for improved clarity in Chinese tax law and for the manner in which tax law is enforced by the authorities, has been the recent hearings given by the Chinese courts to cases addressing the substantive interpretation of Chinese tax law. As discussed in the chapter, BEPS in China – multi-track developments, a case heard by the Zhejiang Province People's High Court in December 2015, concerning The Children's Investment (TCI) fund, was the first Chinese court case to consider the application of the Chinese general anti-avoidance rule (GAAR) to an indirect offshore transfer. A second case heard by the Court of Zhifu District of Yantai City in Shandong Province in December 2015, related to the application of the corporate income tax (CIT) reorganisation relief provisions to a cross-border restructuring of a China investment. A third case, heard by the Guangdong Province People's Intermediate Court, considered the individual income tax (IIT) implications of dual employment arrangements and the application of the China-US double taxation agreement (DTA).
The emerging new trend for cases to be brought to court holds out the potential for enhancing taxpayer certainty with respect to cross-border transactions. This is firstly, by generating, over time, a body of court interpretations that were previously lacking in Chinese tax law, and secondly by providing a path for taxpayers to resolve disputes in individual cases beyond traditional informal negotiations with the local tax authorities. This being said, in many parts of the country local tax authorities may still not be keen for cases to go to court, given the potential for loss of face. Consequently, the transition towards greater court involvement in China taxation will likely differ in degree and pace across the nation.
In relation to obtaining greater certainty for taxpayers, the new trend for tax authorities to grant private tax rulings for cross-border transactions is also significant. Local tax authorities have, with the SAT's encouragement, been granting such rulings for purely domestic transactions for several years. In this regard, a municipal state tax bureau in Jiangsu Province issued a private tax ruling in November 2015 regarding the application of reorganisation relief to the merger of two non-resident holding companies, involving a change in the registered owner of equity in a Chinese enterprise. This received extensive publicity in the Chinese tax media.
Last year's chapter detailed how, in 2014 and 2015 the SAT had abolished almost all of the tax authority pre-approvals that used to be required for a wide range of tax treatments. These ranged from the granting of tax incentives, to the use of tax treaty reliefs, and even to routine matters such as the recognition of tax losses realised on asset disposals. In February 2016, in SAT Announcement 11 (2016), the SAT outlined that just seven matters will be retained as pre-approval items going forward. These related to minor administrative matters, such extensions of tax payment or filing deadlines, but they do not concern substantive tax treatments for tax computation purposes.
As such, the extension of private tax rulings to cross-border transactions, flagged by the November 2015 Jiangsu ruling, is very important. To explain, abolition of pre-approvals frees up both taxpayer and tax authority resources, by releasing both from having to engage in the pre-approval filing and examination process. But, at the same time, it diminishes taxpayer certainty by leaving open whether the tax authorities would accept the taxpayer position on an audit.
However, this gap is being bridged by the progressive introduction of a system of private tax rulings, together with measures to clarify tax laws and ensure consistent enforcement. This is reinforced by improved taxpayer internal tax risk management control systems that are being progressively put in place, particularly by larger and more sophisticated taxpayers. As mentioned in last year's chapter, a greater expansion of private tax rulings is envisaged from 2017 when the new Tax Collection and Administration (TCA) Law, which includes specific provisions on rulings, is expected to be finalised.
Also of direct relevance to greater taxpayer certainty, and as discussed in the chapter, China transfer pricing – first mover on BEPS, is how the SAT is actioning plans to rapidly ramp-up the resources committed to their advance pricing agreement (APA) and mutual agreement procedure (MAP) programmes. It has also issued new guidance on APA administration in SAT Announcement 64 (2016) in October 2016. These steps support China's commitment to the BEPS Action 14 minimum standards for "Making Dispute Resolution Mechanisms More Effective", for which APAs and the MAP both form a crucial part. As explained in the chapter, BEPS in China – multi-track developments, the SAT views these programmes as having a particularly important role in obtaining more tax certainty for outbound investing Chinese multinational enterprises (MNEs). The tax authorities are encouraging such enterprises to open APA processes with the SAT. Numerous MAP cases have also been reported, in which the SAT intervened decisively on the part of Chinese MNEs engaged in tax disputes with overseas tax authorities. However, it might be observed that with resources at the SAT still being limited prior to the planned ramp-up, APA applicants are more likely to get a positive reception where the APA is being sought for new types of related party transactions or for new counterparty authority country locations, thus helping the SAT to expand their experience and knowledge in the APA space.
Advanced targeting of taxpayers and issues – the central role of tax data
The remaking of Chinese tax administration has, at its core, new approaches to targeting taxpayers and tax issues. The more efficient use of tax authority audit resources, directed towards taxpayers who constitute a credible risk of loss of tax revenue, is the complement of other efficiency enhancing measures mentioned in this chapter (e.g. the abolition of pre-approvals, digitisation of taxpayer filings and automation of invoice checking).
This enhanced targeting consists of a number of strands, including:
New institutional and operational arrangements for conducting tax audits;
Close collaboration with the largest enterprises in the enhancement of their tax control systems; and
Tax risk rating (referred to as tax credit rating) of the population of taxpayers, which accompanies other data-driven audit targeting approaches.
For tax audits, a more targeted and somewhat less aggressive approach is progressively being deployed. In the past, the audit bureau of local tax offices could select pretty much any taxpayer at random and launch into audits in a sometimes quite aggressive manner. The new approach is for much of the early taxpayer engagement to be handled by the tax collection bureau, within a local tax office, as assisted by the policy bureau. Based on tax risk assessment, the tax collection bureau will identify particular taxpayers from which further clarifications are needed. Further information will be requested and, if the information confirms that the taxpayer is a risk case, then the tax audit division will become involved. Taxpayer experience of the new approach, where it has been rolled out, is that it is less often as 'hard-edged' as the earlier approach.
Even for tax audit initiatives handled in the first instance by the audit bureau, their work is increasingly defined by national campaigns spearheaded by the SAT, for example in the real estate industry and for cross-border payments. The SAT conducts extensive industry analysis in advance and, therefore, the taxpayers pursued by the audit bureau are those who have high risk tax risk indicators. Data is drawn from a wide variety of sources, including information from other government authorities such as the State Administration of Foreign Exchange (SAFE), so that a far more scientific approach is taken to selecting audit targets. The more sophisticated approach, by being less likely to fall upon taxpayers with no outstanding tax issues at random, and by being more measured, is seen to be conducive to reducing the potential for confrontation and disputes.
Closer collaboration with the largest taxpayers is also a key focus of the SAT's new approach. The SAT launched the "1,000 Enterprises Initiative" in July 2015. This programme covers about 1,000 representative large enterprises from different industries, including MNEs, state-owned enterprises and private enterprises. The chosen companies are given priority access to tax officials at provincial and state level. The idea is that these enterprises can reach beyond the lower level tax authorities, formally responsible for their affairs, and resolve matters at the provincial level. There has been a focus on building up services at the provincial level, with tax authorities encouraged to grant rulings to large enterprises on request, and to assist them with improving their tax control systems. On the whole, it is hoped that this approach will result in more effective tax management and lower disputes. The quid pro quo is that covered enterprises must provide not only tax return and financial statement data, but also information on electronic accounting ledgers and vouchers. This data becomes a key input into tax authority risk analysis models with risk indicators for different industries.
The 1,000 Enterprises Initiative complements initiatives established by the SAT in earlier years, such as the tax compliance agreements (TCA) programme, orchestrated through the SAT large enterprise taxation department. This seeks to leverage the sound internal control through the tax risk management (TRM) systems of the enterprises participating in the programme to minimise the need for inspection of taxpayers' tax reporting and compliance.
Better audit targeting is ultimately driven by data analytics. Pooled data streams, including information on taxpayer TRM systems and historic compliance, as well as business and transactional information, are being harnessed for the tax risk classification of taxpayers. The metric developed is referred to as a 'tax credit rating'. The information on which tax credit ratings are based include internal tax information held by the tax authority, such as records of decisions/conclusions in the tax administration system of tax assessments, tax audits on large enterprises, tax anti-avoidance and tax investigations, as well as external information. The tax credit rating system has been progressively developed through a range of SAT circulars. These include SAT Announcement (2014) no. 40, SAT Announcement (2015) no. 48, and SAT Announcement (2015) no. 85, with further guidance in SAT Public Consultation Draft Circular on Special Tax Adjustments (2015).
As with the schemes increasingly used in Western countries, the tax credit ratings are intended to facilitate the concentration of audit resources on risky taxpayer segments, with low risk taxpayers commensurately accorded a lower level of scrutiny and audit. Credit ratings, A being the best to D being the riskiest, are to be awarded to taxpayers and are to be publicised by the tax authorities. The supervising tax authorities are responsible for the tax credit assessment, determination and announcement of the results. The upper tax authorities shall publicise the results on a consolidated basis.
Importantly, the tax credit rating of taxpayers is now being linked to the availability of preferred treatments. In order to foster the creation of incentives for compliant tax behaviour, 29 Chinese regulatory authorities signed a cooperation memorandum in July 2016, providing for 41 incentive measures, issued as National Development and Reform Commission (NDRC), People's Bank of China (PBOC), SAT Circular (2016) no. 1467. These include:
Expedited arrangements for obtaining special and ordinary VAT invoices. Businesses generally obtain blocks of invoices to cover a month of their estimated needs from the tax authorities. Class A rated taxpayers can obtain three month blocks and replenish readily if VAT invoices are exhausted;
Green lane access (i.e. a special service window at tax service halls) for Class A rated taxpayers;
Priority handling of export VAT refunds for Class A rated taxpayers;
No need for Class A rated taxpayers to have their invoices scanned for verification by the tax authorities. Class A rated taxpayers need simply to log on to their online account and confirm that the VAT invoice information on the tax authorities' systems is correct;
Priority export and import clearance processing from the customs authorities for Class A rated taxpayers;
PBOC and China Banking Regulatory Commission (CBRC) instructions to banks to take into account tax credit ratings when granting loans to enterprises. This policy is going nationwide after earlier being piloted in some of the free trade zones (FTZs) under SAT Circular (2015) no. 208; and
Expedited processing times for Class A rated taxpayers from NDRC and Ministry of Commerce (MOFCOM) on approvals for industrial and engineering projects, company establishment, M&A transactions, etc.
These preferential treatments exist alongside other types of incentives for enterprises with good tax risk ratings. The following incentives have been piloted in the FTZs and may be expanded nationwide at a later point:
Class A rated software exporters based in the Shanghai national innovation demonstration zone may file VAT returns on a quarterly rather than monthly basis; and
The FTZs have launched a policy under which private tax rulings may be granted to taxpayers having a sound TRM system and a Class A rating.
As can readily be appreciated, giving effect to such novel arrangements requires far better drawn arrangements for cooperation between tax authorities and other government agencies, vast sources of information, and high end systems for data storage and processing. China's recent advances in relation to all three of these dimensions are set out in the next three sections.
Updated tax authority institutional arrangements for a new era of tax enforcement
A core initiative in the reform of China's tax administration in 2016 was launched on December 24 2015 with the issuance of the plan on deepening the reform of state and local tax collection and administration systems by the general office of the State Council and the Central Committee of the Communist Party of China. This was followed by a battery of circulars issued over the course of the year that intended to achieve a new intensity of structured cooperation between STBs and LTBs at all levels of government in China. At the May 2016 FTA meeting in Beijing, the SAT placed particular emphasis on this initiative in its outline of Chinese tax administrative reforms to the collected tax commissioners from around the world.
Measures taken to more systematically allocate tasks between STBs and LTBs, and foster collaboration in tax administration include, inter alia:
The SAT Guidelines on STB-LTB cooperation, at version 3.0 from July 2016, which provide a number of key collaborative measures. These include the sharing of tax service halls to limit taxpayers having to shuttle between locations, and establishing a unified mobile online systems for tax services;
Unified standards between LTBs and STBs in relation to the documentation that must be filed in regarding tax incentives are being pursued; and
LTBs and STBs are to jointly draw up lists of major taxpayers and identify tax risk areas relating to this pool of taxpayers requiring explicit follow up (e.g. incentives, losses, and restructurings). Detailed guidance for joint audits by LTBs and STBs is directed at ensuring effective information sharing and collective planning/execution of audits to increase effectiveness and limit the duplication of efforts;
With regards to the latter point, the SAT has provided guidance, in SAT Circular 71 (2016) of May 2016, on exactly which of the abundant new data sources are to be used for the selection of targets for tax inspection. Tax audit relevant information from these preferred data sources will be stored on individual taxpayer files based on their tax identification numbers (TINs) for use by tax inspection bureaus. The guidance also sets out protocols for the latter to follow in selecting and pursuing cases.
This is coupled with the SAT guidance for provincial tax authorities on drawing up lists of key tax audit targets. The conduct of this list-making process rests heavily on data from the tax credit rating system, on information obtained from other government agencies regarding enterprises delinquent in other aspects of their corporate compliance (e.g. social security affairs), and on the lists of taxpayers with high risk features as collectively identified by LTBs and STBs. These enterprises will be grouped with the lists prepared by the SAT on key SOEs and large companies with operations spanning different tax districts in China to establish final lists of local key audit targets. Rolling inspections of key audit targets will have each key enterprise audited at least once every five years. For non-key enterprises a different approach will apply and approximately 3% of the non-key enterprises will be audited annually on a random basis, as provided for in the SAT Circulars 73 and 74 of 2016.
These efforts to get LTBs and STBs working together in a more coordinated, effective fashion will be accompanied, going forward, by steps to clarify the framework under which the LTBs and STBs may mutually collect taxes for each other. Future plans also include setting out comprehensive updated arrangements for the sharing of revenues from national taxes between central and local levels of government.
To take, for example, the May 2016 reform of transitioning business tax (BT) to VAT, the SAT has clarified in what circumstances the LTBs are entrusted by the STBs to accept VAT returns and issue VAT invoices. Before BT was abolished, LTBs administered the tax because the revenues from the levy accrued to the local levels of government in China. Even though VAT is generally administered by STBs and VAT revenues accrue largely to central government (historically split 75% to central government and 25% to local government), LTBs are still being given a role in VAT collection because of their historic experience of collecting BT on the transitioned tax objects. As an interim arrangement until 2018-19, to compensate for the loss of BT revenues, the local governments' share of VAT will be increased to 50%, pending a more permanent settlement to be put in place at that time.
All of the existing STB-LTB arrangements for mutual collection of taxes and tax revenue sharing can be seen to be in transition, and a new, more systematic set of arrangements is set to emerge in due course. The SAT has planned a fundamental modernisation of Chinese tax administration by 2020. This includes, inter alia, moves to put existing tax regulations on a statutory basis and the Spring Breeze project to improve taxpayer services.
A key initiative facilitating the LTBs and STBs to work closer together, and with other government agencies, is the move to unify five enterprise certifications, with five different government authorities, into a single certification. Three licences, the business license, tax registration and organisation code certificate, were initially unified in the 'three certificates into one' reform in 2015. These are now being coupled with the social insurance and statistics registration licenses for a 'five certificates into one' certification. Moreover, an enterprise will now get a unified social credit code upon its business registration to supersede different identification numbers issued by different authorities in the past. This is the so-called 'one license with one code' business registration regime. It might be noted that one key improvement from this system is that newly established enterprises will no longer need to register with the tax authorities separately, as the initial registration with the administration of industry and commerce automatically registers the enterprise for tax.
This integrated and coordinated cooperation of Chinese local tax authorities with each other, and with other agencies of state, is a crucial pre-requisite for the increasing streams of tax data to be collected, pooled, analysed and used effectively.
Tax information – swiftly coming on tap
The fuel for China's new approaches to tax administration is vastly expanded volumes of tax data. The SAT is engaged in a whole series of initiatives that maximise tax data resources, including:
Moving taxpayers in the direction of completely digitised dealings with the tax authorities, thereby rendering tax data in an electronic form susceptible to pooling and analysis;
Pooling domestic data from across domestic tax authorities and other government agencies; and
The international exchange of information (EOI) initiatives.
Under the government's "Internet + Tax" action plan, the Chinese tax authorities progressively facilitate the conduct, by taxpayers, of all their interactions with the tax authorities (e.g. tax filings, electronic invoice management, enquiries, etc.), through the internet and in digital form. This initiative was a particular focus in SAT presentations to global tax commissioners at the May 2016 Beijing FTA meeting. Key individual initiatives include:
Online tax handling. The transition to online tax handling is being spearheaded by certain cities and regions, in line with the 'pilot city' approach, which is typical of Chinese tax reforms. So, for example, the Beijing STB in 2016 is piloting paperless management of export refunds of VAT. Under Beijing STB Announcement 13 (2016), a declaration for an export VAT refund or exemption has to be made online, with paper documents not submitted but simply kept on file by the taxpayer for future inspection. As noted above, there are efforts in the context of the State Council's plan on deepening the reform of state and local tax collection and administration systems, for STBs and LTBs to provide joint online and mobile platforms for tax registration, invoice handling, filing, payment and other functions, and to provide LTB and STB tax services at the same physical locations;
Paperless tax administration. The move online is also linked, as noted above, to efforts to handle all tax matters, where practical, digitally and reduce the use of paper forms and other documents. A nationwide move from paper to digital VAT invoices was initiated by SAT Announcement 84 (2015) in November 2015 for roll out in 2016. This has even gone so far that some Chinese tax authorities are starting to make the issuance of electronic ordinary VAT invoices mandatory, thus disallowing the issuance of printed invoices. This is the case in Beijing with respect to telecommunications service providers, as provided in Beijing STB Announcement (2016) no. 16. This is paralleled by the move to digital customs declarations, with paperless customs having been expanded nationwide in February 2016, under the MOFCOM, GAC Announcement 5 (2016). Customs is indeed at the forefront of the digital transition in China, with a dedicated data exchange interface between taxpayer internal customs records and the customs authority's data systems being launched in 2016 under GAC Announcement 16 (2016);
Online pre-approvals. To the limited extent that some pre-approvals are to be retained by the tax authorities, following on from the mass abolition of pre-approvals in 2015, these are being shifted to online platforms. The SAT has directed, in SAT Circular 142 (2015), that all of the remaining non-abolished tax pre-approval items will be facilitated for online approval; and
Tailored online and mobile tax information services. Significant resources are being invested in online, mobile phone (e.g. WeChat) and telephone information facilities for taxpayers. Taxpayers will be able to access information online that the tax authority retains on them. Services are also being tailored for specific sets of encouraged enterprises, such as 'go global' Chinese enterprises operating in One Belt, One Road jurisdictions.
Apart from the efficiency advantages of these developments, and the reductions in personal interactions between authorities and taxpayers that cut opportunities for corruption, the fact that this information is in a digital form provides tremendous amounts of data for the tax authority to analyse. Data received in the appropriate electronic format can then be pooled with other data sources.
In this regard, China is getting more efficient at pooling the data from domestic sources, and therefore existing tax reporting requirements are becoming ever more detailed.
Information sharing between government agencies: The 5-in-1 certification system for businesses, mentioned above, allows for enhanced information sharing between different government agencies. This sits alongside numerous other initiatives to pool, together with tax information, data from Customs, MOFCOM, the Ministry of Finance, SAIC, public security bureaus, social welfare authorities, and other bodies. Various inter-agency memoranda of cooperation provide the basis for this data pooling, such as the SAT's memorandum of joint action against tax evasion with the SAIC and CSRC, and dedicated information sharing platforms that facilitate the electronic dissemination of the information itself.
More detailed taxpayer filings: Taxpayer filings are also getting more in-depth on many fronts. The 2015 move in China from tax authority pre-approvals to taxpayer self-assessment has been complemented by taxpayer filings (e.g. for treaty relief), becoming much more detailed. The transfer pricing documentation enhancements under SAT Announcement 42 (2016) have also radically upgraded contemporaneous documentation through the local and master files, and related party transaction filings have been significantly expanded, including the addition of the country-by-country (CbC) report. The local file alone requires an extensive value chain analysis, a decomposition of income streams by business line and by product, and extensive new detail on outbound service payments, equity transactions, and outbound investments, which is also mirrored in the related party transaction filings. Enhanced CFC reporting is also provided for under SAT Announcement (2014) no. 38.
All of this data will, in line with the broad move to online tax compliance, ultimately be input by taxpayers online or otherwise supplied in a digital format.
The Chinese tax authorities are also radically enhancing the information they collect on taxpayers' TRM systems. Originally carried out on an ad-hoc basis, reviews of such TRM systems has become a steadily more standardised component of routine tax audit work, as well as in taxpayer 'self-investigations'.
Once the new Tax Collection and Administration (TCA) Law is in place from 2017, financial intermediaries and e-commerce platforms will become key sources of tax authority information. Financial institutions will record taxpayer identification numbers (TINs) in the bank accounts of taxpayers and where business-related payments exceed certain thresholds then these details, together with the TIN of the payee, must be provided to the tax authorities. Obligations for using TINs with all sorts of contracts will put the tax authorities in a position to better match transactions. E-commerce platforms will also be obliged, under the TCA Law, to provide information on online trader transactions. In parallel, it should be noted that the requirement, in MOF, GAC, SAT, Circular 18 (2016), for e-commerce platforms and couriers to supply B2C import information directly to the customs authorities, has already brought significant cross-border e-commerce information on an ongoing basis in this regard.
Finally, beyond the transition to online filing and digitisation, which allows for better capture of taxpayer data, the enhanced details within filings and the new mechanisms for domestic data pooling, China has significantly enhanced its capacity for cross-border tax information exchange, particularly through:
Enhancements to the EOI articles in China's treaties and entering into Tax Information Exchange Agreements with 10 major tax haven jurisdictions;
The FATCA-related intergovernmental agreement with the US for AEOI;
The AEOI under the OECD's CRS system, supported by China's adherence to the CRS Multilateral Competent Authority Agreement (MCAA) from 2018. Formal Chinese regulations to support CRS were issued as a public consultation discussion draft on October 14 2016, setting out details of the financial account information to be reported by financial institutions to the Chinese authorities for exchange with other countries, and the details and timeframes for the due diligence to be conducted by these institutions up to the end of 2017;
The CbC report exchanges under the CbC MCAA from 2018; and
The multilateral exchange of intelligence on aggressive tax planning strategies through the OECD FTA and the Joint International Tax Shelter Information Centre (JITSIC).
The SAT are keen to emphasise the message to taxpayers that they are actively using these new resources. Many of the increased number of tax enforcement cases, reported through WeChat, highlight that big data analysis drove the 'red flagging' of the taxpayer case in the first instance, and that an EOI request to a foreign tax authority provided information on which the enforcement action could be brought forward.
Investment in infrastructure – systems to support an upgraded tax administration
In order to facilitate the new data-driven tax enforcement approaches, the Chinese authorities continue to push the construction and expansion of information platforms.
China is investing in enhanced data warehousing capacity for storing and manipulating huge quantities of tax-relevant data. The sophistication and capacity of these data warehousing systems will become crucial for the Chinese tax authorities in future years as they turn on of the data 'tap', particularly with the planned developments in the new TCA Law and CRS, which will demand capacity to match billions of transactions each year. As noted, the move to online filing and use of digital tax documents facilitates the direct channelling of tax information into big data analysis. Such systems are also necessary to handle the data streams generated from other new tax technologies, such as the 'web crawler' technology used to collect tax-related public information on indirect offshore transfers from the internet. The new national tax authority IT system, referred to as the Golden Tax III project that provides for the centralised collection of national tax data, is crucial in the regard.
Progress has been made towards rolling out the Golden Tax III project to all provinces in China by the end of 2016. The project is running in parallel to other new IT systems projects, such as a new VAT invoice system rolled out in 2016 to allow for real time cross-checking of each VAT invoice. This builds on earlier successes such as the core China taxation administration information system (CTAIS), which integrated all STBs with each other and with other key government institutions for tax data storage, exchange and analysis, and the Golden Tax II project of the late 1990s/early 2000s, which originally standardised national VAT administration.
The Golden Tax III project aims to achieve consistent nationwide tax administration backed by information technology and the processing of tax data in a highly efficient manner. As such, it will not only transform the tax authority's operating system, but will consequently change taxpayers' compliance procedures as well. Once implemented, the improved system and optimised procedure will help the tax authorities to tighten their administration of taxpayers. The Golden Tax III system will automatically detect tax risks that were being ignored before and will result in penalties, as well as impacting the taxpayer's credit on tax collection.
These systems were the centrepieces of the SAT's presentations to global tax commissioners at the May 2016 Beijing FTA meeting.
Sharing insights – tax administrative assistance to developing countries
Finally, it might be noted that China has recently been leveraging its own achievements, with the upgrade to its tax administration processes and systems, to assist developing countries with "tax capacity building".
Capacity building was a centrepiece of the May 2016 Beijing FTA meeting. The FTA meeting communique outlined:
A G20-mandated, joint initiative between the OECD, International Monetary Fund, UN and World Bank group to develop detailed guidance for improving technical assistance to developing country tax administrations;
The establishment of a knowledge sharing platform; and
The setup of a capacity building network to coordinate assistance, from multiple international organisations and national governments, to developing countries.
China's capacity building efforts intersect with the global initiatives and are conducted through a number of channels.
China has implemented 12 bilateral and multilateral cooperation programmes with developing countries, particularly those along the Belt and Road. Under these, the SAT has been providing tax training courses, expert support, experience sharing and technical assistance in building tax capacity. In this regard, workshops on tax administration and taxpayer service were provided to 82 tax officials from 18 African, Asian and Latin American countries in 2015, facilitating further cooperation between those countries and China. As another example, a delegation was sent to Ethiopia in 2015 to help build up its tax administrative capacity and business environment. China also announced in March 2016 the establishment of an OECD-SAT multilateral tax centre to provide tax-related training for developing countries.
Looking to the future, China's assistance to developing countries to upgrade their tax administration systems may come to constitute a key pillar of China's outbound investment policy. Much of China's assistance is directed at the Belt and Road countries so that China is helping to enhance and shape the tax administration of countries in which Chinese businesses will invest and operate. China's more intensive interaction with the tax administrations of such countries, and the manner in which China is interlinking its efforts with those of the international tax organisations, such as the OECD, may give China greater influence on the overall shape of global tax policy and administration. As such, looking ahead, the development of tax administration in China is not just significant for taxpayer activity in China itself, but has a significance for the wider world.
The authors would like to thank Conrad Turley for his contribution to this chapter.
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Tracy Zhang joined the KPMG Beijing office in 1996.
Tracy is national leader of the tax transformation service line. She has been seconded to KPMG Holland to study the Dutch horizontal monitoring system and has extensive knowledge of the tax risk control framework in many countries. She has led the professional team and assisted a number of state-owned enterprises to establish or improve their tax risk control systems.
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Marianne Dong has over 14 years of China tax professional experience. She has provided China tax and business regulatory advisory and compliance services to a wide spectrum of clients in the electronics, consumer markets, industrial, pharmaceutical and education sectors.
Marianne's experience covers a wide range of assistance to multinational clients, including pre-acquisition tax due diligence, entry strategy, structuring of investment holding, operation and transaction models in China, fulfilling registration and compliance requirements, repatriation of profits from China and assistance on liquidation formalities. Marianne has plenty of experience in assisting her clients in exploring tax planning ideas and negotiation with various levels of Chinese tax authorities for favourable/ascertaining tax treatments. Marianne is also experienced in the structuring of tax operation models, process standardisation and tax chart of accounts (COA) harmonisation, with an objective to optimise tax operation efficiency and compliance risk management.
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David Ling is the tax partner in charge of KPMG in Northern China and is based in Beijing. He is a China tax specialist for the industrial and consumer markets sectors. David also leads the China tax controversy and resolution practice.
David joined an international accounting firm in the US in 1992 after he obtained his master's degree in US taxation. He transferred to China in 1993 and has worked in Hong Kong, Shenzhen, Shanghai and mainly Beijing. He became a tax partner in 2002 and joined the KPMG Beijing office the same year.
David has extensive experience in China tax planning and tax negotiation with counterparties. His expertise includes advising foreign companies in establishing operations in China,. He has also accumulated years of experience in assisting multinational clients from various industry sectors to operate in China.
David has extensive knowledge of the China customs regulations, foreign exchange control policies and other regulations which may affect foreign companies' operations in China.
In addition to his connections with the tax authorities at central and local levels, David also has long-time relationships with various Chinese authorities including the Ministry of Commerce, the State Administration for Industry and Commerce, the State Administration for Foreign Exchange, Customs as well as the tax authorities at both central and local levels. He is also the industry faculty member for the graduate study programme of the People's University, one of the top universities with the tax programme.
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Central, Hong Kong
Tel: +852 2143 8753
Karmen Yeung has extensive experience of providing various corporate and individual tax advisory services to foreign investment enterprises in China. She has advised Hong Kong companies and multinational enterprises on structuring their investments in China and establishing tax efficient supply chain models. In particular, she advises companies on the form of investment, corporate restructuring and design of tax efficient supply chain models from sourcing and manufacturing to distribution and retailing in China, from the corporate income tax, transfer pricing, value added tax and customs duty perspectives.
Karmen is a fellow of the Association of Chartered Certified Accountants and the Hong Kong Institute of Certified Public Accountants. She is president of the Taxation Institute of Hong Kong, a co-opted member of the general committee of the Federation of Hong Kong Industries, council member of Asia-Oceania Tax Consultants' Association, honorary council member of the China Certified Tax Agents Association and a Certified Tax Adviser in Hong Kong.