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It is quite apparent that the Chinese tax authorities have recently stepped up their efforts on enforcement and collection of corporate taxes. In fact a few tax audits performed on companies were highly publicized in the media with an aim to increase the overall awareness of the society and to pre-empt taxpayers from engaging in any non-compliance tax practice.
Tax audits are usually carried out by independent tax investigation teams within the tax bureau at the local level or even at provincial level. Selection is based on certain sampling criteria such as the taxpayer's financial and tax position, level of sales, industry specific, nationality or origin of the parent company, etc. Another possibility of becoming an audit target is through informer.
How should a taxpayer handle a corporate tax audit?
Tax system in China is complicated by itself and can be quite difficult for foreign investors and individuals to understand it from time to time. Handling a tax audit in China is even messier. To start off with, targeted taxpayer should find out what the tax authorities are after.
Corporate tax audit is generally focused on the appropriateness or validity of tax treatments on specific items that may result in a "material" tax impact. Some of the typical examples are taxability of an income item, the reasonableness of transfer price for related party transactions, the deductibility of material expenditure and the eligibility for preferential tax treatments, etc. In order to develop an effective strategy for handling the tax audit, it is therefore important to grab precisely the motive and underlying agenda of the tax authorities and to determine what sort of information and documents should be submitted to the officials.
You may require the assistance of tax specialists who have extensive experience in dealing with the China tax officials to help you in preparing for a tax audit and handling queries from the officials. More significantly, the taxpayer may take a more proactive role in managing its China tax audit risk by performing a tax-risk assessment of the foreign investment enterprise or representative office. By so doing, the enterprise will be able to identify tax risk areas and correct them before a tax audit. |
