Tax Digitalization in China: Impact on Corporate Tax Risk Management

Tax digitalization, also known as “digitalized tax administration” or “tax administration by data,” is gaining momentum in China. Enabled by digital technologies and artificial intelligence, Chinese tax authorities have significantly improved the efficiency and accuracy of tax administration. As a result, tax risks are now easier to identify, and tax audits have become more focused and targeted.

The Chinese tax bureau has made significant efforts to advance tax administration through digital upgrades and intelligent transformation. By utilizing modern information technology, the tax authorities have established platforms such as the electronic tax bureau, which enables online processing of tax registration, filing, and payments. Additionally, the promotion of electronic invoicing and the Golden Tax IV system has improved the efficiency and accuracy of tax administration.

This digital landscape allows tax authorities to integrate data from various sources, including invoices, banking information, business records, and customs data. Such integration facilitates more accurate identification of potential tax risks.

Real-time monitoring of companies’ operations and tax behavior enables timely alerts and interventions for potential violations. Meanwhile, it also means tax audits will be more targeted and to some extent, more easily triggered.

This article explores the impact of tax digitalization on businesses in China, emphasizing the evolving dynamics of tax risk management, particularly regarding data supervision.

Background and trends of tax digitalization in China

At the opening ceremony of the 5th Belt and Road Initiative Tax Administration Cooperation Forum on September 24, 2024, Hu Jinglin, Commissioner of the State Taxation Administration (STA) of China, delivered a speech outlining the efforts of Chinese tax authorities to enhance tax administration and efficiency. He emphasized the importance of advancing tax governance through data, highlighting the STA’s commitment to leveraging data and algorithms for intelligent tax management.

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Currently, a pilot program for fully digitalized electronic invoices (e-fapiao) has been expanded nationwide, alongside the launch of a unified electronic tax bureau. Additionally, a smart office platform for tax personnel is under development. These systems aim to provide intelligent services for taxpayers and enable tax officers to deliver differentiated and precise services based on dynamic credit risk assessments.

Furthermore, according to a document released by the General Office of the CPC Central Committee and General Office of the State Council in 2021, titled “Opinions on Further Deepening the Reform of Tax Collection and Administration,” China aims to achieve significant progress by 2025 in reforming its tax administration system. In particular, it aims to establish a robust and intelligent taxation framework and develop a first-class intelligent administrative application system, thereby improving tax law enforcement, service, and regulatory capabilities.

With this milestone approaching, China’s tax digitalization level is expected to be further enhanced.

Hotspots of tax risk areas under tax digitalization in China

Tax digitalization has enhanced the precision of tax administration, making tax risk management in business operations increasingly vital. Beyond traditional tax inspections and audits triggered by specific issues, the advanced tax system can now monitor business data in real time through a comprehensive data supervision mechanism, providing timely alerts for anomalies.

The complexity and wide-ranging nature of a company’s tax risks require taxpayers to pay extra attention to their daily management. Examples of key tax risk areas include:

• Corporate income tax (CIT): This encompasses various aspects such as CIT on royalty fees, mergers and acquisitions (M&As), asset transfers, indirect equity transfers, excessive expense deductions, deemed sales, expenses unrelated to income, additional deductions for research and development (R&D) expenses and other CIT incentives, related party transactions, and asset losses.
• Value-added tax (VAT): Focus areas include deemed sales, timing of tax obligations, input tax deductions, refunds of uncredited VAT, VAT zero rates, VAT exemptions, and VAT refunds.
• Individual income tax (IIT): Focus on areas include tax exemptions for foreign employee allowances, registration and reporting of equity incentive plans, annual reconciliation and audit of overseas employees’ IIT, verification of tax residency status for foreign nationals, and the application of the “six-year rule” (exemption from global income taxation), etc.
• Withholding tax: The applicability of withholding tax and the determination of permanent establishments are also critical points in tax risk management.

Below we demonstrate how tax bureaus profile a company’s tax risks through multi-dimensional analysis.

Corporate tax risk profiling and multiple dimensional risk analysis

In the current taxpayer risk management system of the tax bureau, corporate risk profiling is achieved through a multi-step process based on collected company data and indicators. The risk profile may include risks such as issuing false invoices, substantive risks in industry operations, and potential abnormal activities.

Tax risk profiling

The tax bureau’s risk profiling typically consists of three stages:

Stage 1: Collecting financial data and analyzing industry indicators

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Since 2005, the tax bureau has issued guidelines for taxpayer assessment management, providing general indicators for evaluations, including revenue, costs, expenses, profits, and asset assessments. Ratios and calculations for these indicators were also included. In 2018, the STA published the Financial Statement Data Conversion Reference Standard v1.0, which integrated companies’ financial statement data into intelligent analysis. During the implementation of Golden Tax Phase III, indicators evolved from general to more specific, facilitating both physical and virtual grid management. The ongoing development of smart taxation under Golden Tax Phase IV includes enhanced information interfaces and intergovernmental data exchanges. By leveraging company data and industry indicators, the tax bureau can generate risk models for various companies across different sectors.

Stage 2: Screening for abnormal tax burden and calculating deviation

Tax authorities utilize industry risk models to compare companies’ tax burdens against industry averages, screening for anomalies. Through standard deviation analysis, the tax bureau can determine how much a company’s tax burden deviates from a reasonable range, identifying those with excessively high or low burdens. The tax system calculates warning values based on the coefficient of variation between actual data and industry benchmarks; significant deviations from industry standards trigger alerts.

Stage 3: Calculating and displaying risk scores

Based on financial data, tax burden levels, and industry characteristics—along with specific parameters such as equity transfers and asset changes—the tax authorities calculate an overall risk score for each company. This score is assessed across multiple dimensions, reflecting the company’s risk level within the industry and providing a quantitative management tool for the tax bureau.

Multi-dimensional risk analysis

The ongoing reforms in tax collection and administration have driven significant technological advancements in tax systems. Centered around the implementation of electronic invoices, a unified information platform has been developed to integrate and share data, enhancing data analysis applications. For example, the single-window system introduced in Golden Tax Phase IV intelligently consolidates information on corporate tax liabilities, non-tax business data, and administrative records from other departments. This system enables automated analysis of tax compliance by comparing different tax types within the same company, across various periods for the same company, and among similar companies of comparable scale.

Data operates with remarkable flexibility—able to link seamlessly, like pearls on a string, at the most granular level, while also offering multidimensional insights with precision. This dual capability supports timely and effective management, improved services, and data-driven decision-making.

“Smart Taxation” facilitates tax risk analysis across six dimensions:

Dimension 1: Upstream and downstream invoice analysis

This dimension uses the Golden Tax System’s data analysis capabilities to trace invoice flows between an enterprise and its business partners, ensuring transaction authenticity. It evaluates multi-layered business coherence, focusing on cross-industry or unusual business models and related-party risks. For example, frequent changes in suppliers without justification or shifts in customer behavior, such as moving from retail to wholesale, may signal tax risks. When abnormalities in transaction structures or invoice patterns are detected, the system triggers risk alerts, prompting timely intervention by the enterprise and tax authorities.

Dimension 2: Invoice code verification analysis

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This dimension ensures alignment between business transactions and invoice content via invoice coding. It compares procurement and sales codes to verify consistency with actual business operations. For instance, a trading company should have matching codes for purchases and sales, while a manufacturing company’s codes should reflect its production logic. Discrepancies, such as a trading company buying raw materials but invoicing finished goods, may indicate fraud or fictitious activity, warranting further investigation. Ensuring invoice-code consistency is key to minimizing tax risks.

Dimension 3: Industry chain analysis

This analysis evaluates the company’s role within the broader industry supply chain by comparing its business model and pricing with those of industry peers. It assesses whether the company’s pricing and transaction behaviors align with typical industry practices. Significant deviations from industry averages in pricing or the adoption of unconventional, hard-to-explain business processes in established industries may raise suspicions of fraudulent transactions or aggressive tax planning. In such cases, the tax authority may request additional clarifications from the company. A thorough understanding of industry norms and characteristics is essential to ensure that the company’s business model and pricing are reasonable, thereby reducing risks identified through industry chain analysis.

Dimension 4: Personnel information analysis

This dimension assesses the activities and relationships of key personnel—such as the legal representative, financial director, and tax officer—through a real-name tax management system. It identifies tax risks tied to personnel with histories of violations or involvement in risky business activities. For example, if a legal representative has prior tax infractions in other companies, this may impact the current company’s risk profile. Monitoring key personnel and ensuring compliance minimizes risks linked to individual associations.

Dimension 5: Cash flow analysis

This dimension verifies that cash flow aligns with business activities and operational scale. When authorized, the tax authority can examine bank statements and transaction records. Discrepancies, such as unexplained large cash inflows or a sudden switch from cash to credit transactions, may indicate invoice fraud, money laundering, or tax evasion. Ensuring that cash flow corresponds to business activities and performing cross-checks with invoices are vital for reducing tax investigation risks.

Dimension 6: Equity structure analysis

Equity penetration involves a detailed analysis of corporate shareholder structures and changes, leveraging shared data from various departments to evaluate risks associated with related transactions and tax liabilities. The tax system examines both direct and indirect ownership structures, identifying connections between shareholders and business partners. A company may raise concerns if it employs a complex ownership structure to obscure the identity of the actual controller or evade tax disclosure obligations. Similarly, equity changes that align closely with specific business transactions or result in abrupt and unexplained shifts in operations may indicate improper tax planning or benefit transfer risks. In such scenarios, the system triggers alerts. To mitigate these risks, enterprises must maintain a clear understanding of their ownership structures and their alignment with business operations, ensuring transparency and compliance in all equity transactions.

Conclusion

In summary, the deepening digitization of tax administration and the advancement of smart taxation have not only streamlined corporate tax filing processes but also transformed risk management practices. In this evolving tax landscape, companies must prioritize compliance and proactively address potential risks by adapting to a regulatory framework centered on data-driven oversight.

Looking ahead, the full implementation of the Golden Tax Phase IV system and the anticipated 2025 milestone will further enhance the intelligence and efficiency of tax administration. To navigate these rapid changes and ensure sustainable growth, companies must strengthen their commitment to tax compliance and remain agile in adapting to new regulations.

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