China: Chinese taxation in the era of digitisation

Since the State Council’s announcement of its “Internet + taxation” action plan in 2015, China has been making steady progress in upgrading its technology for data collection, information exchange and big data analysis for tax management and control. All these efforts have enlisted China as an early bird in the era of digitisation, which also brings challenges to multinational groups’ tax risk management.

Several milestones suffice to demonstrate the Chinese tax authority’s aim to set up the “Internet + taxation” structure. Since 2015, the data access code for all Chinese companies has been standardised as one “Unified Social Credit Code” allowing quick access to all the commercial and taxation data of taxpayers, which serves as a backbone for digitised taxa­tion management. The e-tax system (Golden Tax III) has been upgraded to a powerful taxation database, which automatically analyses all financial data, invoices, tax filings and the like. An information exchange platform is being built across various departments including tax, commerce, statistics, banks, customs, public security and foreign exchange. On the basis of digitised data collection, the Chinese tax authority is also blending the concepts of big data and cloud computing into taxation management, and gradually producing electronic filing, paperless submissions, online reviews and diversified clearance windows.

The Chinese tax authority is about to upgrade its approach to tax investigation in a more efficient and effective way. The tax officers can spot taxpayers’ potential tax issues based on the risk alerts popping out from its systems and launch an inquiry into these matters.

A recent TP investigation case in China may well illustrate the Chinese tax authority’s increas­ing ability to identify and investigate risks. An abnormal profitability alert for Company A (CIT rate at 25%) has caught the tax office’s attention by comparing its comparable data. The taxation exchange platform also shows that Company A’s subsidiary, Company B in another city (CIT rate at 15%), has outperformed the market rate. The tax office teams in the two cities started to investigate the company’s function and risk profile and its transfer pricing policy. It was found that although Company A had assumed complicated marketing and control functions, it had purposefully kept more profits in Company B to enjoy an overall lower CIT burden. The tax office has therefore imposed an upward tax adjustment for RMB 27.8 million and a late payment interest at RMB 0.55 million for the past three years.

The Chinese tax authority has been active on the global international tax stage: e.g. con­ducting bilateral tax treaties with 110 countries; participation in the Multilateral Conven­tion on Mutual Administrative Assistance in Tax Matters and BEPS plans. With the help of the more digitised taxation tools, the Chinese tax authority is catching up with the world’s latest knowledge of and technology in taxation management and control.