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2012 China tax inspection plan
Summary
Tax special inspection plays an important role in the tax collection and administration in China. The State Administration of Taxation (SAT) select certain industries, enterprises or individuals in specific industries or activities as instructional or recommended inspection targets. Recently, the SAT released a circular, i.e., Guoshuifa [2012] No. 17 (Circular 17), launching the 2012 tax special inspection plan. Today we will discuss its potential implications and highlights certain areas which we believe taxpayers should pay attention to.
Targets of inspection
The local tax authorities could choose important enterprises and individuals with high income in its territory as the targets of inspection.
Key features of the 2012 tax special inspection
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Targets of inspection |
Key areas of inspection |
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All enterprises and individuals that participated in capital transactions, such as equity transactions, trust products trading, etc., have a chance of being selected as targets for tax inspection. |
- Inspection of the total income(e.g., the investment income |
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is included in the total income of ther enterprise) |
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- Deductible items(e.g., whether an enterprise bears the |
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expenses that should be borne by the investee company instead) |
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- Whether the enterprises submitted the required documents |
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to the tax bureaus in charge for adopting the tax |
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treatments of the special restructuring |
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- Value increase or reduction during the holding period of the assets |
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- Tax avoidance by transfer pricing |
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Trading enterprises engaging in self-supported exportation or acting as agents for exportation of electronic products、garments、furniture or other products. |
- Whether fraudulent export tax refund exists |
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- Whether excessive export tax refund was claimed |
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- Whether taxes were reported and paid for the exportation of goods |
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that should be treated as "deemed domestic sales" |
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- Accuracy of harmonized system code of exported goods |
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- Compliance of application for VAT "exempt、credit、refund" |
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on exportation of purchased goods |
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Other items |
- Reviewing and verifying the reasonableness and authenticity |
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of the accounting records, vouchers and relevant documents |
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- The Withholding Individual Income Tax for employees |
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(especially for senior management staff) |
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- Compliance of annual assessment for enterprise income tax |
Time frame
The 2012 tax special inspection started from the end of March and shall be completed by the end of October.
Covered period
The 2012 tax special inspection should cover the period from 2010 to 2011. In the event that violation of tax laws/regulations is found, the covered period shall be extended.
Detail measures of the inspections
Ø Identifying the production/operation process/status of the taxpayers through internal tax administration system so as to select the proper targets for inspection
Ø Reviewing, verifying and analyzing the accounting records, vouchers and relevant documents
Ø Conducting onsite inspection to identify the actual production/operation capacity/status of the target enterprises
Ø Enquiring with management and relevant personnel of the target enterprises to clarify issues raised
Ø Performing external (e.g., other tax bureaus, other enterprises or institutions) investigation to collect evidence related to target enterprises/transactions
Ø Adopting measures for tax evidence preservation so as to protect its integrity
Ø Coordinating with public security authorities during investigation of tax-related criminal cases so as to ensure smooth inspection
Penalties for the problems found in inspections
Ø For tax evaders, the competent tax department shall pursue the payment of the tax evaded and impose a fine of amount of 50% to five times of the amount of tax evaded
Ø The tax department shall seize the invoices and stop selling invoices to the tax evaders
Ø The tax department may suspend the tax refund to the enterprises cheating for export tax refund from the State within the specified time period
Ø If the act constitutes a crime , be subject to criminal liabilities
Our analyses and suggestions:
We strongly recommend, therefore, that taxpayers get a better grasp of their compliance position as soon as possible and take necessary remedial action to rectify any issues identified. Special attention should be paid to the key areas of inspection as set out in Circular 17. A tax compliance health check by in-house resources or tax professionals can be a good starting point.