2012 China tax inspection plan
Tax special inspection plays an important role in the process of tax collection and administration in China.
Since 1999, the SAT has selected certain industries, enterprises or individuals in specific industries, or activities, as “instructional” or “recommended” inspection targets.
The instructional inspection targets are mandatory inspection subject matters for the subordinate tax bureaus, while the recommended inspection targets may or may not be chosen for inspection.
Recently, the China Taxation News, a newspaper under the supervision of the SAT, reported that the SAT released a circular, Guoshuifa  No. 17 (Circular 17), launching the 2012 tax special inspection plan.
The salient points of the 2012 tax inspection plan are highlighted below:
Key features of the 2012 tax special inspection
Tax inspection targets
Instructional inspection subject matters
- Enterprises accepting special Value Added Tax (VAT) invoices for refined oil purchase
- Capital transactions
- Enterprises applying for tax refund for exporting electronic products, garments, or furniture, as well as cargo agency companies engaging in exportation activities
Recommended inspection subject matters
- Real estate industry and construction industry
- Local commercial / joint-stock banks
- Individual income tax matters of high-income individuals
- Non-resident enterprises engaging in the financial industry
- Other targets selected according to the real situations of each location
Specific tax administration of certain locations
Tax authorities at the local level should carry out the specific tax administration of certain locations concentrating on agricultural processing enterprises or taxpayers not observing compliance requirements. The SAT will select some locations for specific tax administration through direct management or supervision.
Tax inspection of key taxpayers
Furthermore, the SAT provides a list of 14 key tax source enterprises to which the SAT shall issue a separate circular to regulate the matters of their tax inspection.
The 2012 tax special inspection should cover the period from 2010 to 2011. In the event that violation of tax laws/regulations is found, the covered period shall be extended.
The 2012 tax special inspection started from the end of March and shall be completed by the end of October 2012.
Focus areas for the 2012 tax special inspection
The focus areas stipulated by the SAT for each specific inspection item are as follows:
|Targets of inspection ||Key areas of inspection ||Criteria of targets to be selected |
|Enterprises accepting special VAT invoices for refined oil purchase || |
- Whether the purchase quantum matched their reasonable refined oil consumption
- Whether a single purchase was intentionally split into several small purchases
- Whether the enterprise purchased refined oil from various gas stations within a period of time
- Whether the enterprise possesses large-capacity vehicles that purchased refined oil from downtown gas stations
- Whether the enterprise has their own transport vehicles to justify the amount of refined oil purchased
- Whether there were large amounts of refined oil purchased from gas stations located in other cities / provinces
- Whether there were refined oil purchased / refined oil VAT invoices obtained outside the regular hauling track
- Whether there were large amounts / integral amounts of refined oil VAT invoices for a continuous period
- Whether there were inflated amounts of refined oil purchased
- Whether the purchase payments and invoices obtained matched with the account books and records of the buyers
- Total tax burden lower than that of other enterprises engaging in the same industry within the same province
- Enterprises accepting refined oil special VAT invoices for significant amounts
- Enterprises accepting a significant portion of refined oil special VAT invoices from enterprises located elsewhere
- Ratios of the enterprise's input VAT amounts from refined oil purchase against their total input VAT amounts were higher than that of other enterprises engaging in the same industry within the same province
- Total amount of input VAT from refined oil purchase was significant
|Enterprises issuing special VAT invoices for refined oil || |
- Whether the ratio of refined oil VAT invoices issued against the total sales amount is reasonable
- Whether the daily sales records of gas stations can match the issuances of VAT invoices (e.g., consistent timing between the daily sales records and the issuances of VAT invoices)
- Whether there was manipulation of VAT invoices issued for different types of refined oil
- Whether the payers, the recipients and the invoice issuers of refined oil are consistent
- Whether there were large amount VAT invoices issued or VAT invoices issued in other cities/ provinces. If yes, further examinations on the settlement and transportation methods should be conducted
- Whether the license plate numbers and dates indicated on the VAT invoices issued by the gas station match that of vehicles owned by the enterprise
- Total tax burden was lower than that of other enterprises engaging in the same industry within the same province
- Accumulated amount of refined oil special VAT invoices issued are significant
- Enterprise's ratios of output VAT amounts from sales of refined oil against their total sales amounts were higher than that of other enterprises engaging in the same industry within the same province
- Enterprises issuing single refined oil VAT invoices of significant amounts
|Targets of inspection ||Key areas of inspection |
|All enterprises and individuals that participated in capital transactions, such as equity transactions, trust products trading, etc., have a chance of being selected as targets for tax inspection. || |
- Inspection of the total income (e.g., whether the investment income is included in the total income of the enterprise)
- Deductible items (e.g., whether an enterprise bears the expenses that should be borne by the investee company instead)
- Enterprise restructuring, including debt restructuring, share/asset acquisition, merger and division
- Circular 17 specifically emphasizes that the inspection shall strictly comply with Guoshuifa  No. 126 (Circular 126) where the cooperation between tax and industry and commerce authorities in equity transfer information sharing was enhanced
- Whether the enterprises submitted the required documents to the tax bureaus in charge for adopting the tax treatments of the special restructuring
- Value increase or reduction during the holding period of the assets
- Tax credit for outbound investments
|Targets of inspection ||Key areas of inspection |
|Trading enterprises engaging in self-supported exportation (自营出口) or acting as agents for exportation (代理出口) of electronic products garments or furniture (hereinafter referred to as “export trading enterprises”). || |
- Whether fraudulent export tax refund exists
- Whether excessive export tax refund was claimed
- Whether taxes were reported and paid for the exportation of goods that should be treated as “deemed domestic sales”
|Enterprises engaging in exportation of self-produced electronic products, garments or furniture on their own or through consignment (hereinafter referred to as “export self-production enterprises”). || |
- Accuracy of taxable revenue derived from export sales
- Authenticity of freight, insurance premium and commission incurred
- Accuracy of accounting for bonded materials
- Accuracy of harmonized system code (hereinafter referred to as “HS code”) of exported goods
- Compliance of application for VAT “exempt, credit, refund” on exportation of purchased goods
|Enterprises engaging in manufacturing of electronic products, garments or furniture used in the foreign trade export (hereinafter referred to as “export trading suppliers”). || |
- Whether export trading suppliers had capacities to manufacture the goods being sold (e.g., whether the products and their output are in proportion to the capacity of the factories and production equipment owned)
- Whether necessary expenses (e.g., salary, utilities, travel expenses, administrative expenses) for production were incurred
- Whether input VAT invoices for purchase of tax-exempt agricultural products (e.g., cotton) issued by the tax authorities on behalf of the taxpayers were obtained
- Whether consigned processing arrangements exist
Reminder to Business Leaders
Although the full content of Circular 17 has yet to be made available on any official websites, the China Taxation News provides a good reference for taxpayers regarding the direction of the tax inspection for 2012.
Taxpayers are advised to review their compliance position as soon as possible and to take necessary remedial action to rectify any issues identified.
Special attention should be paid to the key areas of inspection as set out in Circular 17, tax compliance health checks by in-house resources or tax professionals can be a good starting point.
Finance and tax executives of the companies that fall within the inspection scope should, in particular, ensure their companies' readiness for possible inspection.
In this regard, It is critical to have documentary evidence to explain the nature of a transaction to the tax bureaus or to support an uncertain tax filing position taken, if any.
In any case, Circular 17 is, in itself, a good reference for taxpayers generally. Taxpayers who are not the targets of the special inspection are still recommended to make reference to Circular 17 for examples of the areas that tax authorities would pay special attention to and areas that tax authorities could find fault with.
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