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China: Enhances tax inspection procedures and builds new Hengqin-Macau cooperation zone

Lewis Lu of KPMG discusses recent developments in relation to tax inspection procedures and the construction of the Hengqin-Macau cooperation zone.

Handling procedure for tax inspection cases enhanced

China has been improving its tax administration system in recent years. In the latest developments, China’s National People’s Congress (parliament) passed a New Administrative Penalty Law (APL) in January 2021. 

Following this, the Chinese State Taxation Administration (STA) on July 12 2021 issued regulations on handling procedures for tax inspection cases (STA order [2021] No. 52, or ‘regulations’), which puts the APL into effect for tax matters. 

Building on the existing 2009-issued procedures for tax inspection, the STA has now made the tax inspection process more standardised while clarifying and enhancing taxpayer rights. 

  • More rigorous requirements are set out for the entire process of tax inspection and enforcement to be clearly documented by local tax authorities. This facilitates higher tier tax authority review that processes are followed consistently and appropriately and should contribute to more even-handed conduct of inspections, going forward;
  • Detailed and specific requirements on the manner in which collection and use of taxpayer electronic data is conducted, to ensure inputs and forensic procedures applied by local tax authorities to them are in line with relevant laws and regulations;
  • More detailed specification of the rights and obligations of taxpayers under inspection, in particular in relation taxpayer ‘rights to know’ and rights of defence in tax cases; and
  • Tax inspection cases are required to be completed within 90 days – for complex cases, the extension will be given upon specific higher tier tax authority approval.

In parallel, local tax authorities are implementing the APL in their penalty provisions. Recently, tax authorities in northern China (Beijing, Tianjin and Hebei) announced the alignment of their rules concerning tax authority discretion in relation to the levying of penalties. 

From October 1 2021, administrative punishment of the listed 53 non-compliance behaviours will be carried out in accordance with a standardised discretion benchmark for these areas. This covers tax registration, account book and voucher management, tax filing and payment, tax audit, as well as invoice management. 

Master plan for Hengqin-Macau cooperation zone unveiled

On September 5 2021, China’s central government released a master plan, setting out policies to support the construction of the Hengqin-Macau deep cooperation zone. This is a significant step to roll out of the Guangdong-Hong Kong-Macau Greater Bay Area (GBA) strategy which was launched in 2019. 

The aim is to allow Macau, a special administrative region (SAR) of China, with a similar governance model to Hong Kong SAR, to undertake industrial diversification by 2035 (Macau is currently better known for its tourism sector). Hengqin island is located in Zhuhai city, Guangdong province (i.e. subject to the mainstream tax and regulatory regime of Mainland China, not being a SAR), which is adjacent to Macau.

Industries such as technological research and development (R&D), high-end manufacturing, tourism, and modern finance will be developed in the cooperation zone. To facilitate this, a number of tax and customs measures will be rolled out. Most of them are akin to the policies introduced for Hainan Free Trade Port (FTP) which was established in 2020. 

  • A reduced 15% corporate income tax (CIT) rate (China standard rate is 25%) will apply to eligible enterprises engaged in industries conducive to Macau’s economic diversification;
  • 100% expensing, and accelerated depreciation regimes for eligible capital expenditure;
  • CIT exemption will apply to profits derived from overseas investments and received by cooperation zone enterprises in the tourism, modern services and high-tech industry sectors;
  • Individual income tax (IIT) exemption designed to produce maximum 15% IIT rate for income of personnel with high-end and urgently needed skills. Another rule will apply to Macau residents working in zone to lower their Chinese IIT burden; and
  • For goods imported into the cooperation zone, a tariff exemption may be applied. Imported materials subject to 30% value-added processing in the zone are exempt from tariff when sold on to other areas in China. 

Alongside these, polices will be rolled out to ease market entry, make transit convenient, and allow capital to flow freely cross-border. 

Lewis Lu
Partner, KPMG China

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