Foreign companies operating in China can benefit greatly from a good tax credit rating and enjoy more favorable treatment when obtaining tax incentives, making bids, applying for loans, and obtaining business qualifications, among other things.
On the other hand, a poor taxpayer rating can trigger a more thorough scrutiny in a wide range of tax-related matters.
In the past few years, the Chinese government has been working on improving and expanding the country’s social credit system. It is crucial that foreign firms are aware of the benefits and consequences of such system.
The Chinese authorities have optimized its corporate credit system to improve the efficiency of tax and credit governance. Enterprises should keep track of their tax credit ratings and the reasons for their poor rating (if any).
In 2014, China issued the taxpayer credit management system, which has been improved since then and integrated to the larger corporate social credit supervision mechanism.
Under the system, Chinese tax authorities collect and evaluate information of corporate taxpayers each tax year (from January 1 to December 31) and confirm the evaluation findings the following April.
Once the credit ratings for taxpayers are determined, the authorities implement corresponding administrative measures, including incentive and punitive measures, for taxpayers of different grades.
All corporate taxpayers that have completed tax registration, are engaging in manufacturing and business activities, and subject to tax collection based on their accounts, are part of the tax credit rating system.
This includes newly established enterprises that have been operating for less than a calendar year, firms without business income in a calendar year, and companies whose corporate income tax (CIT) returns are filed on a deemed income basis.
A non-independent accounting branch established by corporate taxpayers registered with the tax authorities, can voluntarily choose to join the credit evaluation after application.
There are five credit ratings for corporate taxpayers – A, B, M, C, and D. Type A taxpayers have the best tax credit rating with a score of 90 points and above, while Type D taxpayers have the lowest rating. Type D taxpayers have either scored less than 40 or were graded directly as Type D (direct grading applies to taxpayers who have committed serious dishonest acts).
Taxpayers’ scores are deducted when they fail to meet taxpaying credit evaluation indicators.
By entitling A-level taxpayers to more favorable treatments and subjecting D-level taxpayers to stricter scrutiny in a wide range of tax-related matters such as application for invoice issuance and VAT refunds on exported goods, the STA has effectively lowered compliance costs and improved overall compliance.
Since 2015, the State Taxation Administration (STA) has sought cooperation with the China Banking and Insurance Regulatory Commission (CBIRC) in "Bank-Tax Cooperation" and since November 2019, its scope of beneficiaries has been expanded from A level and B level enterprises to M level enterprises.
This has benefited several newly established businesses and helped alleviate financing difficulties for small and micro businesses.
The special Type M was added in 2018 and refers to newly established enterprises with no production and operation income in the tax year and with a tax credit score of more than 70 points.
There are several situations in which a taxpayer cannot be graded as a Type A. Among them when a taxpayer whose actual manufacturing and business period is less than three years, when a taxpayer is graded D based on creditworthiness evaluation of the preceding year, and when a taxpayer who made zero declaration or negative declaration of value-added tax (VAT) or business tax for three consecutive months or six months cumulatively for abnormal reasons during a year.
The taxpaying credit evaluation indicators consist of the taxpayer’s historic information, internal taxpaying information, and external taxpaying information.
The internal taxpaying information contains “recurrent indicators” and “non-recurrent indicators”.
The recurrent indicator refers to data frequently generated by taxpayers during the year of evaluation, such as tax-related declaration information, tax payment information, invoices and tax control equipment information, registration, and accounts books information.
The non-recurrent indicator refers to information not generated by taxpayers, such as the tax bureau’s record of tax assessment, tax audit, anti-tax avoidance investigation, or tax inspection information.
If there is non-recurring indicator information in the past three evaluation years, the starting score of the taxpayer can be 100. In the absence of non-recurring indicator information in the past three evaluation years, the starting score is 90.
Administrative measures, including incentive and punitive measures, are implemented by the authorities after deciding the taxpayer credit rating.
Type A taxpayers will be entitled to favorable treatment like streamlined administrative procedures and fast-tracked approvals, while Type D taxpayers could face increased frequency of supervision and inspection.
The STA has also been participating in the construction of China’s social credit system.
The STA signed a Cooperation Framework on Credit Sharing and Application with the State Development and Reform Commission and 53 Memoranda of Joint Actions on Rewarding Honesty and Punishing Dishonesty with related government departments to further develop mechanisms in credit sharing, mutual rating recognition and cooperation in reward and punishment with respect to credit rating results.
Tax authorities committed to forwarding part of the taxpayer’s tax credit information to banks under the premise of legal compliance and enterprise authorization. Banks will be able to use this information to optimize their credit model and provide credit loans for trustworthy small and micro firms.
China offers tax credit restoration measures as well to encourage corporate taxpayers to proactively fix their tax incompliance record and repair their credit rating.
Since January 1, 2020, corporate taxpayers included in China’s tax credit management system can apply for tax credit restoration by correcting tax irregularities and making credit commitments.
The taxpayer can apply to the relevant tax bureau and make a commitment that the irregularities have been corrected and the tax bureau will then, within 15 workdays, complete the audit and inform the applicant of the result.
After the completion of the tax credit repair, the taxpayer will be subject to the corresponding tax policies and administrative measures based on the recovered tax credit rating.
There have been significant changes in China’s tax credit system which have impacted foreign companies doing business in the region. It is important that such firms keep well informed on the regulatory changes and tax reform and seek professional advice when necessary to avoid punitive measures.
To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at kristina@woodburnglobal.com.
DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.