China’s tax authorities are in the process of executing a new advanced tax collection and payment system, which will digitalize the national network and increase scrutiny of evasion, changing the way the country collects its taxes and greatly influencing the tax management of businesses.
China’s nationwide value-added tax (VAT) administration and monitoring system, named the Golden Tax System Phase IV (GTS), is expected to be launched this year, connecting taxpayers, authorities and policy makers with a massive digital platform powered by big data, cloud computing and artificial intelligence technologies.
The State Administration of Taxation (SAT) has been working since 1994 in the modernization and digitalization of its tax collecting system. The updated GTS will help tax authorities better monitor taxation enforcement and services.
According to Wang Jun, head of the STA, Phase IV will transition from “managing tax through invoices” to “managing tax through big data and the cloud.”
Under the new system, each individual and corporate taxpayer will have a digital account linked to tax authorities. Business transactions will be monitored, automatically calculating and prefilling tax declarations, and sharing information among departments.
The new GTS will change the way business file their taxes, putting corporate tax filing practices under constant regulatory supervision, instead of only during tax season. The digitalization of the system will facilitate the taxation process and will not increase the tax burden on compliant companies. The tax code will remain unchanged.
Nevertheless, the new GTS will change the interaction between taxpayers and authorities, with engagement happening anytime, not just during tax season. The system will also push companies to better comply with tax rules, eliminating some grey-area operations that serve to avoid tax payment.
The Golden Tax System Phase IV will provide taxpayers with more convenient tax filing methods, and it will include timely updates to align with the latest incentive policies. It will also ensure access to personalized account management and services for small and medium-sized businesses.
For individual taxpayers, the new GTS will enable regulators to better monitor their incomes from various sources.
For China, the Golden Tax System Phase IV represents a significant move towards a smart tax system, with the ultimate aim of reducing certain tax rates in the long run by increasing the efficiency of tax collection.
Currently, the country is still using GTS Phase III. This system successfully unifies and integrates the national and local taxation data – tax information of market entities can be swiftly exchanged between respective state and local tax authorities.
The upgraded GTS Phase IV will be based on Phase III but will have added features such as more comprehensive monitoring of businesses, including “non-tax” matters (collection of social insurance premiums); cross-sectoral information sharing (between ministries, commissions, banks, and other institutions) and information verification.
The GTS Phase IV will have a universal e-invoicing platform, which will replace paper invoices with digital tax accounts for individual and corporate taxpayers. The e-invoicing platform will automatically collect and aggregate invoice data from taxpayers, providing services such as invoice verification, prefill tax declarations, and automated tax calculation.
Once the GTS Phase IV is activated, the tax authorities will be able to compare and check the authenticity of the historical tax data submitted by taxpayers through the taxpayers’ bank accounts, bank accounts of related company personnel, related account data of upstream and downstream companies, and revenue, costs, and profits of the same industry.
Through the new system, tax authorities will inspect not only invoices, but also the enterprises’ business, capital, personnel, and other data. This will facilitate the detection of corporate tax evasion.
Some businesses use cash transfers from public to private accounts or from private-to-private accounts to hide some of their income. This kind of tax evasion practice may be identified by the tax authority with access to information from banks.
By incorporating the monitoring of social insurance contributions, the system will encourage enterprises to fulfill their responsibilities of paying reasonable social insurance for their employees.
The new system was created by several tech companies and software developers, including Tencent Holdings, Alibaba Group, Huawei Technologies, Chinasoft International Ltd., Digital China, and Servyou Software Group.
According to data from the STA, China had over 150 million registered individual and corporate taxpayers by the end of 2021. While the launch of Golden Tax System Phase IV has raised concerns among the public about stricter surveillance and higher tax burdens, the system’s intention is to improve tax compliance through digital and intelligent means, and not to increase taxes.
The implementation of the GTS Phase IV represents an important step forward for China’s tax administration. As the system takes shape, companies and taxpayers will need to adapt to the changes, but ultimately, the system is expected to provide more convenience, ensure compliance, and increase the efficiency of tax collection.
The new system may increase the transparency of businesses operating in China. Thus, it is vital for enterprises to understand the upcoming GTS Phase IV and brace themselves for a new era of tightening tax regulation.
Foreign companies should consider seeking professional tax advice to prepare in advance and avoid any future compliance problems when the new GTS system is implemented.
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