Facing Tax Inspections and Audits in the right way (3)

Previously, we shared key points for responding to tax inspections and audits. In this article, we will discuss the late fees and the risk of criminal liability.

IV. Late fees

Late fees for taxes are horrendous and are calculated based on 5‱ per day from the date the tax is late, i.e., 18% annualized on a simple interest basis, i.e., if you incur a late tax 5 years ago, and then are pursued by the tax bureau 5 years later, the late fee is already equal to one time the tax.

Article 63 of the Tax Collection Administration Law of the People’s Republic of China stipulates that:

A taxpayer who forges, alters, conceals, or destroys without authorization account books and bookkeeping vouchers, overstates expenditures or omits or understates revenues in account books, or refuses to make a declaration or makes a false tax declaration after being notified to do so by the tax authorities, and fails to pay or underpays the tax payable, is guilty of tax evasion.

If a taxpayer evades tax, the tax authorities shall recover the unpaid or underpaid tax, late payment fees, and impose a fine of not less than fifty percent and not more than five times the unpaid or underpaid tax; if a crime is constituted, the taxpayer shall be held criminally liable in accordance with the law.

If a withholding agent adopts any of the means listed in the preceding paragraph and fails to pay or underpays the tax that has been withheld or collected, the tax authorities shall recover the unpaid or underpaid tax, and late payment fees and impose a fine of not less than fifty percent and not more than five times the unpaid or underpaid tax; if a crime is constituted, it shall be held criminally liable in accordance with the law.

The Inspectorate has a discretionary range of fines, so positive performance by the enterprise during the tax audit phase offers the possibility of obtaining a favorable range of fines.

• Possible risk of criminal liability

In some cases (especially in the case of joint enforcement by the tax police), a tax audit case may be escalated to a criminal case. Although tax audit itself does not belong to the initial category of criminal cases.

There are two types of tax crimes stipulated in the Criminal Law of the People’s Republic of China that exist more often in daily life.

• One is the invoice type of crime,

i.e., “the crime of falsely issuing VAT invoices, invoices used for fraudulently obtaining export tax refunds and tax deductions; the crime of fraudulently issuing invoices[1]“.

• The other is the crime of underpayment or non-payment of tax,

i.e. “tax evasion[2]“, for which criminal liability will not be pursued after paying back the tax, paying the late payment fee, and accepting the administrative penalty (except for those who have been subjected to criminal penalty or given more than two administrative penalties by the tax authorities within five years for evading the payment of tax).

Therefore, after receiving the reminder from the tax authorities or the Decision on Tax Treatment/Penalty, enterprises should actively raise funds to pay back the tax, so as to avoid the escalation from administrative liability to criminal liability.

Particular attention should be paid to the fact that the issue of false invoicing may involve relatively significant criminal liability, and that crimes such as false invoicing are subject to the criminal liability of the directly responsible supervisors and other directly responsible persons.

• Deregistration doesn’t avoid an audit

Businesses need to get over the fluke that there are some business owners who think that they can stay out of audits as long as their companies are canceled in a timely manner.

In recent years, we have seen many celebrities and internet stars canceling their studios within a year in personal tax audit cases. However, in the cases published by the State Administration of Taxation (SAT) in recent years, many of the canceled companies were still subject to tax audits, and there were cases in which the auditing bureaus directly penalized the actual operators of the companies after they were canceled.

• Finding the right professionals

In the above discussion, it is easy to see that tax response is very professional and serious work. Professionals can not only assist enterprises in achieving results at the level of corporate compliance governance, but also assist enterprises to clarify the direction and formulate professional response strategies promptly during tax inspections, tax audits, and tax criminal cases, to save time and improve efficiency.

At the level of corporate governance, enterprises can hire experienced tax experts to sort out the tax-related risk points of the industry, discover the deficiencies in the daily governance of the company with respect to the company’s individual problems, and formulate compliance proposals so that the management can better understand their own enterprises. On the one hand, the possibility of tax savings can be achieved through compliance control, and on the other hand, the cost of responding to future tax inspections and tax experts can be reduced.

As tax inspections and tax audits are often of a later stage, professional tax experts can assist enterprises in clarifying which planning is legal and which is illegal, guide enterprises not to give up long-term interests due to immediate interests, and do a good job of tax planning under the premise of legal compliance, so that enterprises can satisfy their immediate interests under the premise of lawfulness and legality and not to be recovered taxes and high late payment in the future due to excessive planning or illegal planning. Taxes and high late payment fees.

Professional tax experts can also formulate personalized response plans according to different business scenarios in tax inspections and tax audits, transforming business language into tax language or even legal language, assisting enterprises in improving the efficiency of communication with tax authorities, and making up for the lack of experience and lack of professionalism of enterprises in tax response. Tax experts also make it possible for enterprises and their principals to obtain efficient judicial remedies.

• Conclusion and Insights

It is not difficult to see that the five-year period from 2021 to 2025 will be an important period for China’s tax collection and management to transform from rough to refined.

What can enterprises and accountants do from now on?

• Enterprises should respond to precise tax regulation with refined tax planning.
• The tax positions recruited by the enterprises should focus as well on the assessment of communication skills.
• It is necessary to hire professionals/tax experts to assist during operations.

If you need professional advice or you have other questions about the policy, feel free to contact us.

[1] stipulated in Article 205 of the Criminal Law of PRC

[2] stipulated in Article 201 of the Criminal Law of PRC