Tax Controversy 2024 Comparisons

Tax disputes in China mainly include two major categories. One is VAT invoice-related cases and the other is tax cases. Cases involving VAT invoices are mainly in the category of false VAT, and cases involving taxes are mainly in the category of underpayment of taxes.

Usually, tax authorities find tax cases through daily tax collection and management and tax inspection. After examination or inspection, if the tax authority finds that the taxpayer has tax violations, the tax authority will issue relevant documents to recover the tax, and even impose administrative penalties. If the taxpayer is not satisfied with the decision or punishment, there will be a tax dispute.

In the process of tax inspection, taxpayers and tax authorities have different understandings on the application of tax policies or incentives, which often leads to tax disputes, especially for value added tax, enterprise income tax and individual income tax.

China’s tax authorities are constantly strengthening tax supervision. Compared with the past, “smart tax” (ie, using AI) systems such as the fourth phase of the Golden Tax (including a comprehensive digital electronic invoice system) can carry out comprehensive data management for enterprises and individual taxpayers. Tax authorities monitor taxpayers’ tax risks in a timely manner through intelligent analysis of Big Data. These risks might once have been considered unproblematic. This also leads to frequent tax disputes.

On the one hand, taxpayers should standardise the fiscal and tax system to avoid tax disputes from the source. On the other hand, for matters that are likely to cause tax disputes, consult a tax professional in a timely manner and seek outside assistance.

At present, tax avoidance disputes only occupy a very small proportion in China’s tax disputes. Tax evasion (mainly income tax) and invoice violation (mainly value-added tax) are the focus of attention of China’s tax authorities, which also the main types of disputes.

After a tax dispute occurs, the taxpayer must first pay taxes or provide a guarantee before applying for administrative reconsideration. Only if the taxpayer is dissatisfied with the administrative review decision can he file an administrative lawsuit.

Taxpayers who deliberately violate tax regulations and avoid paying taxes through deception, concealment, etc, may be deemed as tax evasion by the tax authorities. The tax authorities will recover taxes, late payment fees, and may also impose fines on tax evaders. If tax evaders fail to pay back taxes and late fees after the tax authorities issue a recovery notice in accordance with the law, they may be held criminally responsible.

When tax authorities select audit targets, they usually randomly select from the list of abnormal taxpayers. Taxpayers on the list usually have high risks, tax violations, abnormal tax returns or low credit tax ratings.

Conventional methods such as “double random and open” are the main sources of tax inspection cases.

Tax whistle-blowing is one of the key triggers for tax audits, especially for the well-known enterprises and individuals.

The inspection bureau shall, within 90 days from the date of filing the case, make a decision on administrative handling, punishment or conclusion on no tax violations. If the case is complicated and needs to be extended, the extension may not exceed 90 days upon approval by the Commissioner of the Tax Bureau; Special circumstances or force majeure need to continue to extend, shall be subject to the approval of the deputy director in charge of the tax bureau at the next higher level, and determine a reasonable extension period. In some cases, the period of the tax audit (audit) may suspend the calculation. For example, request higher authorities or seek the opinions of competent authorities, taxpayers, withholding agents to provide information beyond the deadline.

Generally, tax audits are conducted at the taxpayer’s premises and the documents reviewed include printed documents and electronic data. The tax authorities will also collect the taxpayer’s materials and check them again after returning to their offices.

The industries that tax inspections focus on include the waste material recycling industry, the bulk commodity trading industry, and the live broadcast industry. The focus of the tax inspection is mainly whether the invoice is compliant and whether the tax is underpaid.

First, based on the authors’ practice, the increasing prevalence of rules concerning cross-border exchanges of information, and mutual assistance between tax authorities, has not insignificantly increased tax audits in China. But mutual assistance between domestic tax authorities in different provinces increase rapidly.

First of all, taxpayers must actively co-operate with tax audits and conscientiously conduct self-examination and risk assessment and rectification. Then taxpayers must communicate effectively with the auditors. Pay attention to the collection and backup of relevant evidence such as audit materials and work procedures.

Where a dispute arises between a taxpayer and a tax authority over payment of tax, the taxpayer must first apply for administrative reconsideration. If the reconsideration decision is not satisfied, administrative proceedings may be instituted. The taxpayer shall, within 60 days after the payment of the tax or the provision of the guarantee, file a reconsideration with the tax authority at the next higher level.

Under normal circumstances, the administrative reconsideration organ shall make an administrative reconsideration decision within 60 days from the date of accepting the application. Under special circumstances, the extension may be appropriate, but the extension period shall not exceed 30 days.

If the reconsideration authority fails to make a decision within the time limit, the applicant may bring a suit in a people’s court within 15 days from the date of expiration of the reconsideration period.

For the tax payment dispute, the taxpayer needs to apply for administrative reconsideration after paying the tax before filing an administrative lawsuit. A taxpayer who refuses to accept the decision of administrative reconsideration may bring an administrative suit.

For other tax disputes, taxpayers can either file a lawsuit directly to the court or conduct an administrative reconsideration before filing a lawsuit.

The litigation procedure mainly includes four stages: prosecution, acceptance, trial and judgment.

No information has been provided in this jurisdiction.

In criminal proceedings, the prosecutor bears the burden of proof to prove the defendant’s guilt. In administrative proceedings, the tax authority bears the burden of proof for the specific administrative act. In case of tax-related civil litigation between taxpayers, whoever claims, whoever produces the evidence.

For tax disputes, China’s tax authorities generally issue two types of instruments: processing decisions and penalty decisions. For processing instruments, taxes must be paid and administrative reconsideration must be conducted before litigation can be initiated. For penalty instruments, litigation can be filed directly. Generally speaking, paying tax is a must.

Do not provide too much evidence unless that evidence is very convincing.

Understand the disputed issues and prepare a defence to the disputed issues in advance.

Prepare possible solutions in advance, which can be used as reference documents to be submitted to the court.

Provide expert opinion when necessary, which is usually very helpful to convince the judge.

First, China is a country of statutory law, not case law. When it comes to international tax issues, similar precedents, principles and international norms from abroad will be studied in depth, but usually not be used as a basis for final decisions. Meanwhile, in order to ensure the uniformity of the judgment, the Supreme People’s Court also publish relevant domestic reference cases and guidance cases.

In China, courts adopt a two-instance system for hearing cases. If the judgment or order of first instance is not accepted, the time limit for appeal shall be 15 days and 10 days respectively, counted from the second day after receiving the written judgment or order.

The appeal procedure mainly includes three stages: the appeal, the appeal hearing and the appeal decision.

The appeal case is decided by the court of second instance. The court must form a collegial panel to try the case, and the collegial panel shall be composed of judges or judges and jurors. The collegial panel shall consist of an odd number of three or more persons. Public interest litigation cases, cases involving land acquisition and demolition, ecological environment protection, food and drug safety, and cases with significant social impact will be heard by a seven-member collegial panel composed of people’s assessors and judges.

Administrative reconsideration organs may conduct mediation in handling administrative reconsideration cases. Mediation shall follow the principle of legality and voluntariness, shall not harm the interests of the state, the public interest and the legitimate rights and interests of others, and shall not violate the mandatory provisions of laws and regulations.

Tax administrative mediation shall be sponsored by the reconsideration authority. Tax administrative mediation emphasises substantive justice and is not strictly procedural. The location, method, and procedures of tax administrative mediation do not need to follow a fixed pattern, and the parties have the freedom to choose.

Through the administrative mediation process, it is possible for the parties to reach an agreement that may involve a reduction in the tax assessment, interest or penalty payable that may ultimately apply.

Tax advance ruling refers to the service behaviour in which enterprises apply for specific complex tax-related matters expected to occur in the future, how to apply tax laws and regulations, and tax departments inform policy application opinions in writing based on current tax laws and regulations, based on the principle of mutual trust between tax enterprises. This behaviour can avoid the occurrence of tax disputes for specific tax activities.

If the parties reach an agreement through mediation, the administrative reconsideration organ shall prepare a mediation statement for administrative reconsideration, which shall be legally effective after being signed or sealed by the parties and affixed with the seal of the administrative reconsideration organ. If the mediation agreement made by the administrative reconsideration organ is not fulfilled, the administrative reconsideration organ may enforce it according to law, or apply to the people’s court for compulsory execution.

Disputes related to transfer pricing are often mutually recognised through multiple rounds of negotiations before administrative reconsideration.

Tax evasion cases generally do not directly trigger criminal cases. As long as taxpayers pay taxes and late fees on time, they will not be involved in criminal liability. VAT invoice cases are more complex and may involve both administrative and criminal liability.

Anti-tax avoidance cases generally do not involve criminal liability.

For tax evasion, the tax authorities will verify the tax amount in advance. Taxpayers who pay back taxes and late fees will not be held criminally responsible. If a party is suspected of falsely invoicing VAT invoice, he may be directly held criminally responsible, regardless of whether he has paid back the tax.

Tax authorities generally do not initiate administrative or criminal proceedings on their own initiative. Administrative authorities believe that the parties suspected of crimes, will transfer the relevant clues to the public security organs, and eventually may evolve into tax criminal cases, administrative cases into criminal cases often occur. Criminal liability often arises in VAT invoice cases.

Administrative case procedures – the tax authorities inspect and review taxpayers and finally make a decision.

Criminal Case Procedure – in tax evasion cases, taxpayers who have not paid their taxes will be referred to the authorities for criminal prosecution. For VAT invoice cases, regardless of whether the tax is paid back, the case may be transferred to the authorities for criminal liability.

Both basic courts and intermediate courts may hear criminal cases. Different courts, criminal cases by the criminal court, administrative cases by the administrative court (some courts in parts of China, such as Shanghai, have special tax courts). However, the tax court only hears tax-related administrative cases, not civil and criminal cases.

For tax evasion cases, taxpayers who take the initiative to pay back taxes and late fees do not need to be held criminally responsible. For VAT invoice cases, back-payment of taxes does not exempt criminal liability.

For tax evasion cases, taxpayers who take the initiative to pay back taxes and late fees do not need to be held criminally responsible. For VAT invoice cases, back-payment of taxes does not exempt criminal liability.

The parties may lodge an appeal with the people’s court at the next higher level over the first instance people’s court.

If the company’s transactions are suspicious and there are suspicions of underpayment of taxes, it may be subject to a tax audit, which may lead to administrative cases.

The bilateral tax agreement presupposes a mutual agreement procedure mechanism between the tax authorities of both contracting countries, which can help taxpayers solve the problem of double taxation. In the “Multilateral Convention on the Implementation of Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting”, the MAP mechanism is supplemented with compulsory arbitration procedures and becomes a dispute resolution mechanism that members of the Convention can choose to apply.

Due to the limitations of the special anti-tax avoidance provisions of tax treaties and the domestic general anti-tax avoidance provisions, the international community is unable to face increasingly frequent and complex treaty abuses. The national tax base is eroded, and the implementation effect of domestic administrative management will be further affected. Therefore, PPT clauses will definitely appear in the development trend of future tax treaties.

Challenges to transfer pricing and are carried out by the tax authorities themselves. China has clear rules on transfer pricing investigations, adjustments, and bilateral consultation mechanisms, which are usually done by the international tax department of the tax authorities.

The Tax Tribunal has jurisdiction over tax administrative litigation cases. Taxpayers who do not agree with the decision of the tax authority may file an administrative lawsuit with the Tax Tribunal after reconsideration procedures.

In China, unilateral or bilateral advance pricing agreements are a common mechanism to avoid or mitigate litigation on transfer pricing matters. And China produces APA’s annual report every year to disclose relevant information.

Cross-border situation mentioned in the question rarely involve tax litigation in China. According to the authors’ practice, previous cases concerning indirect transfers of equity interests in PRC companies by non-resident enterprises have involved tax litigation, and such cases are actually regarded as general anti-avoidance disputes in China.

No information has been provided in this jurisdiction.

No details have been provided in this jurisdiction.

This is not applicable in this jurisdiction.

This is not relevant in China.

China has not adopted arbitration clauses in relevant treaties. Regarding the issue of avoiding double taxation, China only provides for mutual agreement procedures.

No information has been provided on this topic for China.

No information has been provided in this jurisdiction.

This is not applicable in China.

No details have been provided in this jurisdiction.

No information has been provided concerning this topic in China.

This is not relevant in the Chinese jurisdiction.

This is not relevant in China.

No independent professionals are being hired by taxpayers or by the state in China.

There is no fee required for administrative review. The litigation fee for administrative litigation is RMB50 per case.

The litigation fee is generally paid in advance by the plaintiff and finally borne by the losing party.

If tax authorities use or destroy seized property or illegally implement inspection or enforcement measures, causing losses to taxpayers, taxpayers have the right to demand compensation in accordance with the law.

No information has been provided concerning court fees if a taxpayer opts to use ADR mechanisms in China.

China has not disclosed relevant information.

No relevant statistics have been released.

According to published verdicts, the vast majority of winners were tax authorities, but the total number has not been publicly tallied.

To resolve tax disputes, taxpayers should return to the nature of transactions and the logic of tax laws.

1. Fully understand and grasp the facts and evidence involved in tax disputes, and understand whether it is a tax dispute or invoice dispute, which are the two core categories of tax disputes in China.

2. Pay full attention to the basis of tax authorities’ tax opinions, and understand the source of the basis – legal or normative documents.

3. Where criminal liability may be involved, priority should be given to how to avoid entering the criminal stage.

4. Do not waste any relief procedures, daily risk response, statements, hearings, reconsideration, or litigation.

5. For specific professional opinions, be sure to communicate with the tax authorities in writing. If the facts are clear, try to pay taxes in advance, which is conducive to reducing late fees and reducing the potential or number of penalties.