Tax Investigation on Abnormal Tax Liability Rate? Possible!
The focus of the tax inspection department in 2021 is on tax liability management and tax investigation. In fact, an excessively high or low tax liability rate is abnormal and will attract attention to the tax inspection department, as the tax liability rate is one of the important indicators for the tax authorities to evaluate whether your business operations are reasonable.
When will your business be interviewed?
Usually, the tax authorities will determine a range of industries and then launch an investigation on companies with abnormal tax liabilities from the industry, so what are the reasons for a business to be interviewed?
- The assessment reveals that the tax liability of the enterprise has changed abnormally, or the tax liability rate has been far below the level of the same industry for a long period of time.
- The enterprise does not make normal tax filings: failure to file tax returns in a timely manner, including not filing tax returns on time, filing incomplete tax returns, etc.
Pay attention to the following 3 points in detail:
- Inconsistencies between sales reported in the tax system and sales invoiced in Tax Control System and in the financial statements
- Zero returns for three or six consecutive months
- Change rate in input tax is significantly higher than output tax
- There are anomalies in the data relating to invoices.
- Anomalies in the increase and use of VAT invoices compared to previous periods
- Newly established enterprises which, within a short period of time, receive many special VAT invoices with a low tax liability
- Multiple invoices need to be invalidated for reasons such as wrong tax classification codes
- The enterprise’s supplier is currently out of contact and your enterprise’s VAT purchase invoices will need to be input tax reversed.
- There is a mismatch between revenues of enterprises and staff number, business operating space, electricity consumption, water consumption and the number of equipment, etc. which will lead to speculation that there may be an under-recognition of revenues.
- Indicators such as costs and gross margins are clearly unreasonable, or the business has been losing money for a long time but has not gone out of business, etc.
These are just some of the common reasons of why you can be interviewed by the tax inspection department, but there are many more reasons that have not been talked about.
How to respond effectively or with advance warning?
As we mentioned above, in practice, tax authorities adopt tax alert to strengthen the management of taxpayers. The tax authorities have set a few indicators, and by analyzing the taxpayer’s data, if the indicators are significantly lower than the industry level, they will attract the attention of the tax authorities. If the taxpayer is unable to give reasonable reasons in the face of the tax authorities’ enquiries, it will be subject to investigation, which will bring tax risks to the enterprise.
So how can a company know if there is an abnormality in its tax liability rate? How can you respond in a reasonable and timely manner? If an enterprise receives a tax alert message due to an abnormal tax rate, how should it comply?
Step 1: Companies need to analyze the reasons for the early warning in a timely manner.
Step 2: If it is determined that the early warning information is not related to the enterprise’s own reasons, you should collaborate and present relevant materials to prove it; if the tax liability rate is abnormal due to the enterprise’s own operation, you should give a reasonable explanation and provide a solution.
For any further inquiry, please do not hesitate to contact us.
