Contributed By King & Wood Mallesons
Tax controversies in China generally refer to tax disputes that arise between the tax authorities and taxpayers or tax withholding agents. Tax controversies may arise in various circumstances, such as in response to administrative decisions made by the tax authority under a tax audit, transfer-pricing investigations, general anti-tax avoidance investigations, etc. Sometimes, dissatisfaction with the routine tax administrative activities of the tax authority, such as denial of preferential tax treatment, denial of tax refund or failure to perform tax administrative duties (ie, so-called administrative omission) promptly, may also lead to tax controversies.
Value-added tax, enterprise income tax and individual income tax constitute the main sources of tax revenue in China, and these taxes usually give rise to most of the tax controversy cases in China.
Land value-added tax is also an area that may create tax controversies due to the complexity of the land value-added tax regime.
Before delving into how to mitigate tax controversy in China, it is first necessary to understand why tax controversies arise in China.
Based on our observations, the main reasons for tax controversies in China are as follows:
To mitigate tax controversy risks, it is necessary for taxpayers to establish comprehensive, sound tax compliance management in their daily business operation.
As an active participant in the BEPS Action Plans, China takes the position that the BEPS achievements should be combined with the practical situation of the PRC. With the progress of BEPS, China issued administrative rules for general anti-tax avoidance in December 2014, updated rules governing the indirect transfer of Chinese taxable properties in February 2015 and introduced anti-tax avoidance rules into the individual income tax regime in August 2018. These measures set out a more comprehensive legal basis for tax authorities to combat anti-tax avoidance practice but, in the meantime, have caused an inevitable increase in the volume of tax controversies.
In addition, on the international side, China signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting in June 2017, aiming to amend Chinese double tax treaties/arrangements in an effective manner and implement the BEPS actions in relation to tax treaties, eg, anti-treaty shopping rules and dispute-resolution mechanisms. This convention is expected to serve as guidance for mitigating cross-border tax risk and better resolving of international tax disputes. The convention is not yet in effect, so its practical impact is subject to further observation in the future.
If a taxpayer intends to contest an additional tax assessment imposed by its relevant tax authority, it must file an administrative review claim before initiating a judicial claim. To lodge an administrative review proceeding, it is necessary for the taxpayer to pay off the assessed tax and the interest surcharges or to provide the adequate guarantee within the prescribed time limit. Failure to do so will result in loss of the right to initiate the administrative review and the subsequent judicial claim proceeding.
If the taxpayer neither pays the assessed tax nor files an administrative review claim within the prescribed timeframe, the tax authority is empowered to initiate compulsory enforcement measures upon the approval of the competent tax bureau’s chief. More specifically, the tax authority may notify the bank to deduct and remit the outstanding tax from the bank account of the taxpayer/tax-withholding agent, or detain, seal up and dispose of the goods or other properties of the taxpayer/tax-withholding agent by auction or sale at an amount equivalent to the tax, etc. In addition, the tax authority may impose an administrative fine ranging from 50% to 500% of the outstanding tax.
China adopts a random selection system to select the targets of tax audits. Under this system, taxpayers are classified into:
Around 20% of those classified as key tax-revenue source enterprises are selected for tax audit each year, which means that in principle a key tax-revenue source enterprise is subject to tax audit every five years.
Among those classified as other taxpayers, no more than 3% of enterprise taxpayers and no more than 1% of non-corporate taxpayers are selected for tax audit each year.
Despite these general rules, if a taxpayer has any bad tax records, such as abnormal status of tax filings for a long period, low tax creditability rating, a history of violation of tax laws, etc, it is more likely that it will be selected for tax audit.
In addition to the above general tax audit selection approaches, there are a few other situations which may cause a taxpayer to become the subject of a tax audit.
Theoretically speaking, a tax audit should be completed within 60 days of its starting date. This period can be extended once by approval of the chief of the tax audit bureau. In practice, however, it is common that some audit cases may last longer (even for a few years) due to complexities.
A tax audit typically includes the following steps, including both on-site inspection and desktop review at the tax authority’s office.
The tax audit bureau issues a Notice of Tax Investigation to the tax audit target and initiates the tax audit process.
The investigation is conducted by various means, including on-site inspection, review and collection of the relevant accounting books and other materials, making inquiries with the relevant personnel, examination of relevant bank accounts, collecting information or seeking assistance from other tax bureaux or governmental authorities, etc.
Upon completion of the initial investigation process, the investigation bureau shall submit its internal work report to the assessment division of the tax audit bureau for review. The assessment division, upon completion of the review, shall formulate a written opinion for review by the division head. If the tax audit case is complicated or has a significant impact, a collective trial shall be conducted to decide the case.
If the assessment division intends to impose a tax administrative punishment on the target, it shall deliver a Notice of Tax Administrative Punishment and inform the target of its legal defence rights. If the target makes any statement or defence, this shall be properly documented and signed off by the target. In some cases, the target has the right to request a hearing.
Upon completion of the above assessment procedures, the tax audit bureau prepares the final notification letter(s). Depending on the results of the tax audit, the notification letter could be a Decision Letter on Tax Administrative Punishment, a Conclusion Notice of Tax Audit Case, etc.
The enforcement division of the tax audit bureau is responsible for delivering the final notification letter to the target. If the decision and notification letter require the target to pay additional tax, the target shall pay off the outstanding tax, interest surcharges and/or the administrative fine within the stipulated time limit. Otherwise the tax audit bureau may take compulsory enforcement measures upon approval by the head of the tax bureau, or apply to the People’s Court for compulsory enforcement, unless the target lodges an administrative review process in due course.
At the beginning of each year, the State Administration of Taxation (SAT) formulates the priorities of tax audit work nationwide for the year. This usually includes three aspects.
In the past, Chinese tax authorities acquired or exchanged tax information with other jurisdictions on a case-by-case basis, and this information was therefore not central to the tax audit process.
With the enhancement of global collaboration in the exchange of information, and in order to combat cross-border tax avoidance, it is in no doubt that, going forward, more and more tax audit cases will arise from exchanged information, particularly in areas concerning Chinese tax residents’ offshore assets/transactions, and the onshore assets/transactions of foreign nationals.
When a taxpayer is faced with a tax audit, it should first and foremost contact competent tax counsel, which could help provide some initial advice and tactics covering the aspects listed below. As the tax audit case progresses, the tax counsel could provide continuous legal support in all of the following respects and help achieve a relatively favourable audit result, to the extent possible.
A taxpayer may lodge an administrative review claim against the tax authorities in respect of a specific administrative act.
Where the specific administrative act relates to tax collection, an administrative appeal phase is compulsory before a judicial claim can be initiated. For other types of specific administrative acts conducted by tax authorities, eg, administrative punishment, compulsory enforcement measures, invoice administrative acts, failure to fulfil duties, etc, a taxpayer may elect to initiate a judicial claim directly without going through the administrative appeal phase.
As a general rule, a taxpayer shall duly apply for an administrative appeal within 60 days of the date when it acknowledges the existence of the specific administrative act concerned. The taxpayer is required to pay off the assessed tax and the interest surcharges or provide an adequate guarantee within a specified time limit before filing an administrative review claim, which is usually 15 days in practice.
The administrative appeal application shall be made to the competent tax administrative review authority, which is the tax bureau at a higher level in principle. There are some exceptions: for instance, an administrative claim against a specific administrative act conducted by a tax audit bureau shall be made to the tax bureau to which the tax audit bureau is subordinate.
Upon receipt of the taxpayer’s application, the appeal authority shall review the application within five days to decide whether to accept or reject the application, or request that the applicant supplement or correct the application materials.
The respondent tax authority is required to submit a written reply to provide the relevant evidence, legal basis and other relevant materials. The appeal authority will review the applicant’s application and the respondent’s response. The applicant also has access to the respondent’s response materials, unless the materials involve any national secrets, commercial secrets or personal privacy. In addition, the respondent tax authority is not allowed to collect additional evidence from the taxpayer or other related parties during the review.
In principle, the administrative appeal shall be conducted on the basis of reviewing relevant written materials. However, if the taxpayer makes a request or the appeal authority considers it necessary, the appeal authority may hold a hearing in which the applicant and the respondent authority appear to present their positions.
In principle, the appeal authority shall make a decision within 60 days of its acceptance of a claim. However, if the case is complicated and the appeal authority is unable to make a decision within the prescribed time limit, the time limit may be extended to 90 days upon approval by the head of the appeal authority.
It is not uncommon in China that tax administrative appeal cases are eventually settled by the applicant and the respondent authority through mediation. During the mediation process the administrative appeal period is suspended.
If the appeal authority fails to make a decision within the prescribed time limit, the tax officials who are directly in charge (and other persons directly responsible for the violation) shall be issued with administrative sanctions, eg, disciplinary warning, recording of a demerit or of a serious demerit. In addition, technically speaking, the applicant may lodge a separate administrative review or judicial claim against the appeal authority for its failure to make the decision on time.
Tax disputes between taxpayers and tax authorities are classified into two categories: tax collection actions and other tax-related actions.
In tax collection actions, such as a decision to pursue taxes and late payment interests, administrative appeal to the upper-level tax authority is a prerequisite for filing a lawsuit to court. If a taxpayer refuses to accept an appeal decision (either sustained or changed by the upper-level authority), it can file to court. It should be noted that, currently, a taxpayer should settle tax payment and late payment interest or provide a tax guarantee that is confirmed by the initial tax authority before it can file an administrative appeal to the upper-level tax authority. The tax guarantee precondition mechanism is now under discussion and review for amendment by the China Tax Collection and Administration Law.
For other tax-related actions, such as administrative penalties or invoice administration measures, taxpayers are entitled either to claim an administrative appeal to the upper-level tax authority or to file to court straightaway.
The current judicial system of China foresees three categories of litigation:
It should be made clear that China does not yet have a specialised tax court, nor does it have an exclusive judicial procedure for tax litigation, though in recent years China has been studying the feasibility of establishing specialised tax tribunals. Currently, litigation concerning tax disputes between taxpayers and tax authorities takes the form of administrative litigation, whereas litigation concerning tax crimes initiated by public prosecutors against taxpayers is considered as criminal litigation. Since criminal tax cases (ie, concerning serious illegal behaviour relating to taxes) are much less common than administrative tax cases, what follows will focus on administrative tax litigation. References to criminal tax offences are made in 7 Administrative and Criminal Tax Offences, below.
The administrative tax litigation procedure is as follows.
Stage One – Initiation of Litigation and Acceptance of a Case
In tax collection cases, if a taxpayer refuses to accept the appeal decision, the taxpayer can, within 15 days of the date of receipt of the appeal decision, initiate litigation in the court which has jurisdiction. For other tax-related actions where the taxpayer decides to file directly to court, the court filing shall be made within six months of the date the taxpayer knew or ought to have been aware of the decision of the tax authority.
Before acceptance of a case, the court will review and consider whether the court filing satisfies statutory requirements, ie, that:
With respect to jurisdiction, administrative tax litigations should be filed to the court in the place where the tax authority that initially undertook the tax decision is located, or also the court in the place where the appeal tax authority located if the case has been administratively appealed. In general, the primary courts (at the county-level) will try first-instance cases, unless the case is of significant social impact and complexity.
Stage Two – Pre-trial Proceedings
When a case is accepted, the first-instance trial will formally begin. It proceeds in the following way.
Stage Three – Trial and Hearing
Stage Four – Court Decision
In general, the court decision will be pronounced in public within six months of the date of a case's acceptance for a tax litigation applying the ordinary procedure, or 45 days for a litigation applying the simplified procedure.
Where the court concludes that the tax authority’s decision is inadequate in its essential evidence, erroneous in its application of laws and regulations, non-compliant in its legal procedures, ultra vires, constitutes an power abuse or is obviously unfair, the court will revoke or partially revoke the tax authority’s action and rule that the tax authority must make a new tax decision. Otherwise, the court will reject the claims of the plaintiff.
Evidence and/or witnesses must be cross-examined during the session of the court investigation, at the stage of trial and hearing.
The relevance of evidence depends on the individual facts of each case. Pursuant to laws, the court shall scrutinise each piece of evidence with respect to authenticity, legality and relevance. The court shall then conduct a comprehensive review of all evidence, and objectively and neutrally determine its degree of relevance to the case by following professional ethics (conscience) and using logical reasoning and life experience, excluding evidence that is not relevant, so as to determine accurately the facts of the case.
In principle, the defendant (ie, a tax authority) shall bear the burden of proof, and if it fails to provide evidence within the specified time limit, it will be deemed as having no evidence regarding the disputed tax decision. In individual cases, the plaintiff may also provide evidence proving the illegality of the tax decision, but the failure of the plaintiff to do so does not exempt the defendant’s burden of proof.
In addition, administrative tax litigation strictly follows the rule that evidence obtained after making a tax decision cannot be used as evidence to justify the tax decision.
Strategic options to consider include the following.
Overall, administrative tax litigation demands highly technical and rich experience in both tax and litigation, and taxpayers should seek assistance from professional tax lawyers.
Chinese courts adjudicate cases based on applicable rules derived from existing statutory rules. Pursuant to administrative litigation laws, the court’s trial of an administrative litigation shall be on the basis of laws (legislated by the National People’s Congress or its Standing Committee), administrative regulations (legislated by the State Council) and local regulations (legislated by the provincial people’s congresses or their standing committees).
Accordingly, when trying administrative tax cases, the courts will not rely on jurisprudence from international courts, doctrines or international guidelines; however, reference may be made to this jurisprudence where applicable under the framework of the China tax laws and regulations.
China adopts a nationwide system of 'four-tier court and the second-instance judgment being the final judgment'. The four-tier court system includes the primary court at the county level, the intermediate court at the municipality level, the high court at the province level, and the Supreme People’s Court.
If either party to a case refuses to accept the first-instance judgment, then irrespective of the nature of the controversy or the value it can file an appeal to the upper-level court for a second-instance trial. The appeal should be filed within 15 days of the date of service of the first-instance judgment (or 30 days for foreign parties).
A first-instance judgment which has not been appealed, or a second-instance appellate judgment, will effectively be a final judgment and should be executed. However, if either party believes the executed judgment is wrongful (with respect to evidence, law application, legal procedures, omission of claims, etc), it can initiate the procedure for trial supervision to the upper-level court within six months of the effective date.
In second-instance trials the court shall form a collegial panel of judges (usually three) to try the case through a court session, following the trial and hearing procedures as in a first-instance case. Nonetheless, if after review of the case file, investigation and questioning of the parties, the collegial panel finds that no new fact, evidence or reason is raised, it may decide not to hold a court session. The appellate court will generally make a judgment within three months.
In a trial supervisory procedure a separate collegial panel should be established to hear a supervisory case. The supervisory case relating to a first-instance judgment follows the procedures of first-instance trial, and the supervisory case relating to a second-instance judgment follows the procedures of second-instance trial.
At first instance, the ordinary procedure will generally be applied, under which a collegial panel with an odd number of panellists (usually three) should be established, consisting either entirely of judges or of a combination of judges and jurors. The presiding judge of a collegial panel is appointed by the president of the court or the chief judge of the administrative division within the court. When the president of the court or the chief judge of the administrative division participates in a trial, he or she shall be the presiding judge. The collegial panel will discuss the case internally and make a judgment following the principle of majority rule. Nevertheless, a simplified procedure can be applied upon consensus of parties, in which a sole judge appointed by the president of the court will try the case and make a judgment.
At second instance, a collegial panel of judges (usually three) will be formed. The collegial panel of second instance cannot be a sole judge or a panel consisting of judges and jurors. The presiding judge of a collegial panel is appointed by the president of the appellate court or the chief judge of the administrative division within the appellate court.
Where the procedure for trial supervision is initiated, its establishment of judges follows the rule of first instance if it supervises a first-instance judgment, or second instance if it supervises a second-instance judgment.
China has no particular alternative dispute resolution (ADR) mechanism available for resolving tax controversy cases. However, it is possible for a taxpayer and a tax bureau to resolve their tax disputes through settlement or mediation, which can be initiated during an administrative appeal or a judicial litigation.
Before the appeal authority makes a decision in an administrative appeal proceeding, the taxpayer and the respondent tax authority may reach a settlement, or the review authority may hold mediation based upon the mutual willingness of the parties, provided that the specific administrative act at dispute is a matter concerning the rationality, rather than the legitimacy, of the administrative act.
With respect to a judicial litigation regarding tax dispute claims, mediation is not allowed in principle, with certain exceptions. For example, a tax dispute case involving administrative compensation may be settled by mediation provided that both parties reach the agreement and no national interest, public interest or other party’s legitimate rights are adversely affected.
In a settlement or mediation agreement, the parties may only agree to reduce the assessed tax amount if the tax assessment at dispute was made by the tax authority in invoking its discretional rights, for instance, the tax was assessed based on a profit rate deemed by the tax authority with certain discretion. Similarly, the amount of an administrative fine may be reduced through settlement or mediation, as the extent of administrative fine is generally determined at the discretion of the tax authority.
Notably, however, no settlement or mediation can be reached to reduce the amount of interest surcharges, as the interest surcharges are automatically calculated based on the overdue days and the outstanding tax amount. The tax authority has no discretion in determining the amount of interest surcharges.
China does not currently have a formal advance ruling mechanism.
This is not applicable in China, as China does not have any particular ADR mechanism.
This is not applicable in China. There are no ADR mechanisms for transfer-pricing cases or cases where taxes are determined by indirect methods.
If a tax authority makes a tax assessment requesting payment of overdue tax (or late payment interests or penalties), such a tax assessment does not in itself confer an administrative tax offence on the taxpayer, irrespective of whether it is based on tax audit or special tax adjustment by applying general anti-avoidance rules (GAAR), specific anti-avoidance rules (SAAR), etc. This is because such an assessment is not final, given that the taxpayer is entitled to file an administrative appeal to the upper-level tax authority or to file administrative tax litigation to court, if the taxpayer believes the tax assessment is wrongful in its fact-finding, application of laws or due process, etc.
With respect to criminal tax offences, whether or not a tax crime has been committed should be exclusively determined by a court upon trial and hearing of a criminal litigation which is initiated by a public prosecutor against a suspected taxpayer, rather than an assessment made by tax authorities, though the clues of tax crimes are generally provided by tax authorities.
There is no direct relationship between the administrative process and the criminal process.
The administrative process governs disputes between the taxpayer and the tax authority concerning whether or not taxes should be paid (or late payment interests or penalties) or whether the taxpayer has issued false invoices, etc, and follows the theory of judicial supervision of administrative power and protection of taxpayer rights.
The criminal process, meanwhile, deals with serious behaviour jeopardising tax collection and administration of the state, such as tax evasion, false issuance of invoices, or defrauding of export tax refunds, etc, which in principle are unlawful acts concerning large amounts of taxes.
The administrative process is initiated once a tax authority makes additional tax assessment. If the taxpayer refuses to accept the assessment, it can file administrative appeal to the upper-level tax authority or then file administrative tax litigation to court.
A criminal tax offence under a criminal hearing and trial generally results from tax assessment. This is because tax crimes refer to serious illegal tax behaviour, while in practice it is the tax authority that has first access to illegal tax acts information during its assessment. Pursuant to laws, tax authorities are obliged to transfer suspected criminal tax offences to public security bureaus for investigation, if the tax authority takes the view that a suspected tax crime has been committed during/after its assessment. If the public security bureau then identifies a suspected tax crime after investigation, it should file the case to the public prosecutor for criminal proceedings.
As mentioned above, there is not currently a specialised tax court in China, and accordingly administrative tax litigation is tried by following the general administrative case process, whereas criminal tax offences are tried by following the general criminal case process, and there is no direct relationship between the two.
For the stages of administrative tax litigation, please refer to 4.2 Procedure of Judicial Tax Litigation, above.
The stages of criminal tax litigation mainly include:
Compared to administrative litigation, criminal litigation follows stricter requirements on procedural rights of the suspect and adopts a higher standard of proof (beyond reasonable doubt).
Each level of court under the four-tier court system contains a civil division, an administrative division and a criminal division, and the three divisions respectively hear civil cases, administrative cases or criminal cases. As such, the administrative tax litigation and the criminal tax litigation may be heard by separate divisions of the same court.
Legally speaking, there is no statutory rule stating that upfront payment of an additional tax assessment can reduce corresponding fines. However, since the statutes usually provide fines in terms of a range and grant the tax authority discretion on the specific number of fines, the tax authority may, at its own discretion, apply a lower limit within the fine range if the taxpayer makes payment pro-actively.
The laws do not allow entry into an agreement with a tax authority or the public prosecutor to prevent or stop a criminal tax trial.
Nevertheless, it should be noted that criminal law provides for exemption from criminal liabilities for tax evasion crime if certain requirements are met. Specifically, if the taxpayer who committed the tax evasion act has made up the taxes payable and late payment interests upon the request of tax authority, and has been administratively punished, the taxpayer shall not be subject to criminal liability, except if the taxpayer has already been criminally punished for tax evasion within the preceding five years or has been administratively punished by tax authorities for tax evasion twice or more within the preceding five years.
Any party (the accused or the public prosecutor) refusing to accept the first-instance judgment on criminal tax offence can appeal to the upper-level court for a second-instance trial within ten days of service of the first-instance judgment. The accused’s appeal can be made in writing or orally.
A supervisory procedure can be initiated on an effective judgment (ie, a first-instance judgment which has not been appealed, or a second-instance appellate judgment), upon application of either the accused or the public prosecutor, if they believe the executed judgment is wrongful with respect to evidence, application of law, legal procedures, etc.
Tax authorities are empowered to make special tax adjustments on tax-avoidance transactions/operations, by applying GAAR or SAAR (eg, transfer pricing, thin capitalisation, controlled foreign corporations, etc). The tax authority will assess comprehensively the reasonable commercial purposes and economic substance of a transaction/operation, on the basis of detailed analysis of the facts and particulars of each individual case.
Technically speaking, a taxpayer can appeal to the upper-level tax authority or further file a lawsuit to court with respect to such a tax adjustment decision. In practice, however, there have only been a limited number of appeals or litigations in this regard. Two concerns may contribute to the situation: firstly, in common practice, a GAAR investigation or a transfer-pricing investigation will conduct substantial communication with taxpayers, and the decision may be internally reported to upper-level tax authorities for review or confirmation, given its complexity and the large amount of taxes concerned. After such an investigation process, the taxpayer will generally accept the tax-adjustment decision and the appellate tax authority would always sustain such a decision. Secondly, the tax adjustment on tax avoidance is more of a matter of reasonableness assessment than a legality issue, but the current administrative litigation allows a court to check the legality of a tax decision, unless it is obviously unfair. However, the court is not in a tax-professional position to determine the degree of unfairness of a special tax adjustment, such that the court will not easily overturn a special tax-adjustment decision.
Separately, tax avoidance cases, being different from tax evasion which intentionally evades taxes, generally do not give rise to criminal liabilities.
In cases where a double taxation situation occurs due to a tax assessment or tax adjustment in a cross-border situation, it is rare for the taxpayer to resort to domestic litigation. Double taxation generally originates from two tax jurisdictions’ different treatments of a tax matter, but the court will only check the legality of the Chinese tax authority’s decision. Hence, if the decision fully complies with domestic tax laws, it will be sustained by the court. Any double taxation resulting from the tax decision is supposed to be managed through communication between competent authorities of the two jurisdictions.
Taxpayers may make use of a mutual agreement procedure (MAP), which is stipulated in double tax treaties entered into by China, and domestic tax laws also provide guidance on initiation of MAP by the taxpayer or the competent tax authority in the other jurisdiction.
On a separate note, China does not currently accept any international tax arbitration mechanism.
GAAR or SAAR applies in cross-border situations covered by bilateral tax treaties. For example, the tax authority can perform transfer-pricing adjustment on transactions between a Chinese entity and its related party in a contracting state, and the tax authority can apply GAAR to deny entitlement of treaty benefits under a treaty-shopping arrangement, etc.
Transfer-pricing adjustment cases are rarely presented to a domestic court. One of the important reasons for this is that a transfer-pricing adjustment focuses on the reasonableness of profit allocation between related parties, while the administrative litigation is currently restricted to legality censorship; hence, the chance of a taxpayer obtaining court support against a transfer-pricing adjustment is not high.
Most tax treaties entered into by China contain a mutual assistance procedure (MAP) clause, which allows the tax authorities of the contracting states to settle cross-border tax disputes, including transfer pricing, by agreement. In China, the number of MAP cases (transfer pricing accounts for more than 60%) has increased in recent years. Among the 21 MAP cases closed in 2017 in China, ten cases were agreed by bilateral tax authorities to eliminate completely the impact of double taxation, three cases partially eliminated the impact of double taxation, and four cases were granted relief by unilateral tax authorities. It is expected that more transfer-pricing cases will be resolved or attempted to be resolved through the MAP clause.
Since 2005, China has engaged in negotiating and entering into advance pricing agreements (APAs) with multinational enterprises. From 2005 to 2017, Chinese tax authorities signed 87 unilateral APAs and 60 bilateral APAs. China has been steadily promoting APA negotiation work aiming at improving tax certainties, reducing tax administration costs, as well as avoidance of double taxation.
Enterprises whose related transaction volume exceeds CNY40 million per annum for the past three years are eligible to apply for APA negotiation with a tax authority. APA negotiation contains six main stages:
Overall, the number of litigations against tax decisions on cross-border situations is quite small, given the reasonableness assessment nature of such tax adjustment and the shackle of legality censorship under the current judicial regime. In 2015, there was an attention-attracting administrative litigation filed by a foreign entity against tax authorities' withholding of tax collection on an offshore share transfer, where the tax authority, by applying GAAR, deemed the transaction to be an indirect transfer of a Chinese entity without reasonable commercial purpose. The case went through first instance, second instance and the trial supervision procedure, and the courts determined that the plaintiff lacked sufficient evidence to prove that the tax decision was illegal, and thus upheld the tax authority’s GAAR adjustment.
To mitigate tax litigation, taxpayers should improve tax compliance in transactions/operations and duly keep relevant materials to substantiate a tax-compliance status, and the tax authority should strictly follow the laws and regulations in tax administration and conclude tax decisions accepted by taxpayers based on solid technical and sufficient evidence.
No official charges are levied by the authorities in a tax administrative appeal proceeding.
The court charges a case acceptance fee at a fixed amount of RMB50 for each instance of tax administrative litigation. The fee shall be prepaid by the taxpayer within seven days of receipt of the Notice for Litigation Fee Payment from the court before the beginning of the proceedings and borne by the losing party at the end of the litigation, unless the winning party agrees to bear the fee voluntarily.
The applicant (eg, a taxpayer) may request an indemnity (ie, administrative compensation) in an administrative review claim. Where the applicant wins the administrative review case, the review authority will grant the taxpayer’s compensation claim where the taxpayer will be compensated in accordance with the standards prescribed under China National Compensation Law.
Similarly, the taxpayer may claim for the indemnity (ie, administrative compensation) in a judicial litigation proceeding. If it is judged that the specific administrative act which caused damage to the taxpayer is illegal or invalid, the court may mediate on the compensation matter. If the mediation fails, the court may proceed to issue the judgment on the compensation matter, or as an alternative, the court may inform the taxpayer to initiate a separate litigation on the compensation matter.
Where the taxpayer does not claim for an indemnity during the administrative review claim or judicial litigation proceeding, it may lodge a separate litigation with respect to the compensation claim.
As mentioned in 6.1 Mechanisms for Tax-related ADR in this Jurisdiction, above, there is no ADR mechanism in China. Neither is any fee charged under a settlement or mediation process.
Since China does not have a specialised tax court, tax cases concerning disputes between taxpayers and tax authorities are uniformly heard by administrative divisions of courts who also hear administrative cases against other authorities. There is not currently a specific platform to disclose progress of pending tax cases.
According to statistics provided by the Supreme People’s Court from 2010 to 2017 (the 2018 statistics are not yet available), there were 398 first-instance administrative tax cases in 2010, 405 in 2011, 436 in 2012, 362 in 2013, 398 in 2014, 636 in 2015, 683 in 2016, 555 in 2017. The annual average of tax cases was 484, accounting for 0.3% of the annual average of all administrative cases (167,063).
There is no official public data on types of tax or value involved in these tax cases. Incomplete statistics on case information provided by a third-party database show that, of administrative tax cases in the past decade, VAT (including business tax) cases accounted for about 40%, enterprise income tax cases accounted for about 16%, individual income tax cases account for about 10%, and cases relating to other taxes (deed tax, land VAT, real estate tax, etc) aggregately account for about 34%. Also, according to database statistics, the average disputed value of tax cases is around RMB5 million, varying from RMB100-RMB100 million.
Incomplete statistics on case information provided by a third-party database show that tax authorities succeed in almost 90% of administrative tax cases, while taxpayers succeed in only around 10% of administrative tax cases. However, the numbers of taxpayers winning have been increasing in recent years, and this increase is expected to continue, given the continuously improving tax judicial environment in China.
Key strategic guidelines to consider in a tax controversy are as follows.