Guidelines for Managing Large Enterprise Tax Risk Released

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Jun. 1 – China’s State Administration of Taxation released a guideline last month for how large enterprises should manage tax risks in the current economy.

Released on May 5, Guoshuifa (Tax Circular) No. 90, “China SAT Guide for Large Enterprises to Manage Tax Risks,” provides guidance for large enterprises regarding their overall corporate tax compliance and related tax risk control.

Though not expressly defined, tax risk is the potential of underpayment of taxes resulting in penalties, interest and possible loss of business license. The elements of tax risk specified in paragraph 3 of the guide include:

  • Tax compliance knowledge
  • Tax staff ethics and competence
  • Organizational structure and operating processes
  • Technical processes and the use of information technology
  • Financial operations and position
  • Design and operation of internal control
  • Economic, industrial and competitive operating environment
  • Regulatory environment
  • Other relevant tax risk elements

The circulars guidance involves the design and function of the corporate tax department, specific strategies to address tax risk control and the design of corporate processes for the flow of information within the organization that have tax compliance implications.

Paragraph 2 provides guidance on the design and function of corporate tax departments. Specifically the design and function should incorporate the following::

  • Expressly defining the responsibilities and duties of corporate tax department and its function within the organization (the Guide provides eight responsibilities and seven duties)
  • Establishing separation of duties within the tax department and other corporate departments as it relates to tax risk control (The guide details the specific areas in which separation of duties is required)
  • Establishing the qualification, training and supervision of tax department personnel
  • Establishing processes to continuously collect internal and external information as it relates to tax risk control

Paragraph 4 provides guidance for establishing and implementing strategies to control tax risk. The most important of these is the involvement of the tax department in significant corporate decision making such as formulation of pricing strategies and related party transactions. SAT recently released regulations regarding the annual reporting of related party transactions.

Paragraph 5 provides guidance on the flow of information within organizations. The most relevant relate to the use of information technology to capture and analyze information as it relates to tax compliance and the related tax risk control.

For more information on this tax circular, please contact tax@dezshira.com or visit www.dezshira.com.