China Issues National Anti-Avoidance Audit Regulations

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Aug. 31 – China’s State Administration of Taxation (SAT) has issued two new circulars to enforce tax collection and administration measures for  maintaining tax revenue growth and widening its domestic tax collection base.

Circular No. 85 titled “Several Opinions on Improving Tax Collection and Closing Tax Loopholes, ” and Circular No. 114 called “Detailed Measures on Further Reinforcing Tax Collection and Administration” underline China’s goal to implement and utilize anti-avoidance investigations in improving tax collection.

Government officials also want to emphasize the importance of Nationally Coordinated Investigations, Regionally Coordinated Investigations and Industry Coordinated Investigations to auditors and local tax bureaus around the country.

China intends to deploy the National Anti-Avoidance Audit (NAA) that involves tax authorities from multiple regions collaborating on nationwide investigations of a targeted industry or company. The SAT uses the NAAA to discern the facts and circumstances of an industry’s operations in China and to identify companies with significant tax issues worthy of further investigation.

The SAT’s latest circulars emphasizing the NAAA indicates that it is determined to expand its use and focus on tax avoidance. Certain industries have already been targeted, among them pharmaceutical, tire manufacturing, highway operations and the steel and mining industries.

Accordingly, a number of regional tax bureau have already commenced investigations into companies within these fields. The investigation process is likely to expand to other industries, one at a time, on a rotational basis.

Certain issues trigger can warrant an Industry Coordinated Investigation. These include situations where a large number of businesses within that industry have reported consecutive losses over recent years. The SAT is concerned that such losses may reflect weaknesses in specific industries and seeks to develop its understanding of related party transactions and the actual business environment.

Such investigations are meant to assist China’s state-owned enterprises through the National Development & Reform Commission to readjust industries and bring them back into profitability.

Companies seeking advice on reporting in China may email Dezan Shira & Associates’ National Tax Partner, Sabrina Zhang at tax@dezshira.com.