Tax disputes in China include two main 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. Where an audit or investigation reveals tax non-compliance, 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.
China’s tax compliance landscape witnessed a marked escalation in 2024. Taxpayers are routinely compelled to engage in rectification processes to address identified fiscal irregularities. Concurrently, the State Taxation Administration has intensified targeted industry-wide compliance sweeps across high-risk sectors, including cross-border e-commerce and renewable energy projects, triggering a surge in complex multi-layered disputes that increasingly require resolution through administrative reconsideration or litigation under Article 88 of the Tax Collection Law.
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, they should consult a tax professional in a timely manner and seek outside assistance.
At present, tax avoidance disputes only constitute a very small proportion of 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, and are 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 an administrative lawsuit be filed.
Taxpayers who deliberately violate tax regulations and avoid paying taxes through deception, concealment, etc, may be deemed as tax evaders by the tax authorities. The tax authorities will recover taxes, late payment fees, and may also impose fines for tax evasion. 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 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 conclude that there have been no tax violations. If the case is complicated, an extension of up to 90 days may be approved by the Commissioner of the Tax Bureau. Special circumstances or force majeure requiring further extension shall be subject to the approval of the deputy director in charge of the tax bureau at the next higher level, who will determine a reasonable extension period. In some cases, the calculation period may be suspended during the tax audit if higher authorities are consulted or if information is requested from competent authorities, taxpayers or withholding agents.
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’ practical experience, the increasing prevalence of rules concerning cross-border exchanges of information, and mutual assistance between tax authorities, has not significantly increased tax audits in China. However, mutual assistance between domestic tax authorities in different provinces is rapidly increasing.
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, paying attention to the collection and back-up 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 satisfactory, administrative proceedings may be instituted. The taxpayer shall, within 60 days after paying the tax or providing a guarantee, file a reconsideration application 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, an 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 reconsideration period expiry date.
For a 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 includes four main stages:
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 tax-related civil litigation between taxpayers, whoever makes the claim produces the evidence to support their case.
The options to be considered are as follows.
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 publishes relevant domestic reference cases and guidance cases.
In 2024, the Supreme People’s Court and the Supreme People’s Procuratorate jointly promulgated the Interpretation on Several Issues Concerning the Application of Law in Handling Criminal Cases of Endangering Tax Collection and Administration (Fa Shi [2024] No 4), which further clarified the criteria for determining the crime of false issuance of special VAT invoices. The introduction of this new judicial interpretation has sparked intense debate within judicial circles in practice regarding the application of these criteria.
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 includes three main stages:
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.
A seven-member collegial panel composed of people’s assessors and judges will hear the following types of cases:
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, the parties may reach an agreement involving a reduction in the ultimate tax assessment, interest or penalty payable.
Advance tax rulings (ATR) allow enterprises to apply in seeking clarity in relation to specific complex tax-related matters expected to occur in the future, and how to apply tax laws and regulations; and tax departments provide policy application opinions in writing based on current tax laws and regulations, fostering 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 organ’s seal. If the mediation agreement 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. Parties suspected of falsely invoicing VAT may be directly held criminally responsible, regardless of whether they have paid back the tax.
Tax authorities generally do not initiate administrative or criminal proceedings independently. Administrative authorities that the suspect parties of crimes will transfer the relevant information to public security organs, and eventually this may evolve into a criminal case. Criminal liability often arises in VAT invoice cases.
Administrative Case Procedures
In administrative case procedures, the tax authorities inspect and review taxpayers and finally make a decision.
Criminal Case Procedures
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.
Types of Court
Both basic courts and intermediate courts may hear criminal cases. Different courts hear tax administrative infringement processes and tax criminal cases: 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 (principal purpose test) will definitely appear in the development trend of future tax treaties.
Challenges to transfer pricing 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 (APAs) are a common mechanism to avoid or mitigate litigation on transfer pricing matters. China produces an APAs annual report to disclose relevant information.
Cross-border situations such as WHT (withholding taxes), PE (permanent establishment) or transfer pricing rarely generate tax litigation in China. According to the authors’ experience, 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 the 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, one should return to the nature of transactions and the logic of tax laws.
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service@minterpku.com www.minterpku.comThe Latest in Tax Controversy in China in 2025
In recent years, the Chinese government has continuously strengthened the construction of smart taxation, constantly advanced the process of tax legislation, and actively participated in international tax mutual assistance and co-operation. The legal rigidity of Chinese taxation has been continuously enhanced, the tax administration capacity and level of tax authorities has been continuously improved, and the transparency of tax information at home and abroad has been continuously increased. The level of tax compliance and tax dispute resolution capabilities of foreign investors in greenfield investments and cross-border trade in China need to be rapidly upgraded and effectively adapted to these trends.
Trends of tax disputes in 2025
The National Taxation Work Conference held by the State Taxation Administration in January 2025 unveiled four key regulatory priorities for this year, which are tax issues arising from non-compliant efforts to attract investment, criminal offences of false invoicing and tax fraud, enhanced precision in supervision through big data analysis, and tax avoidance planning devised by tax intermediaries. As a result, tax disputes between mainland enterprises and tax authorities in 2025 are expected to focus on areas such as issuing false invoices, export tax rebate fraud, illegally enjoying local tax preferences, and malicious tax evasion planning. Tax compliance risks remain severe across several specific sectors, where tax disputes continue to occur frequently, including coal, petrochemicals, renewable resources, agricultural products, pharmaceuticals, logistics and transportation, flexible employment, venture capital, film and entertainment, corporate mergers and acquisitions, and high-net-worth individuals.
Affected by the economic downturn, local governments face enormous pressure to organise tax revenue. Some tax authorities will trace back the tax payments of certain enterprises in previous years for tax-related matters with rather ambiguous implementation standards of tax policies, which makes it more difficult for enterprises to prevent tax risks. For instance, at the beginning of 2025, tax authorities in provinces like Yunnan and Hainan placed retroactive adjustments for certain venture capital enterprises that had previously enjoyed reduced corporate income tax rates under the large-scale development of the country’s western regions and Hainan Free Trade Port preferential policies. These enterprises were disqualified from tax benefits on grounds of failing to register with the Development and Reform Commission. The amount of tax recovered reached over CNY100 million, which sparked disputes between tax authorities and enterprises.
In terms of cross-border trade in goods, disputes over royalties in the taxable prices of imported goods occur frequently. According to the Measures of the Customs for the Determination of the Customs Value of Imported and Exported Goods revised by the General Administration of Customs in October 2024, the royalty paid directly or indirectly by the buyer within China to the seller or third party abroad shall be included in the taxable price as long as they are related to the goods or constitute the conditions for sale. It usually involves patent rights, the right to use proprietary technology, trade mark rights, copyright, sales rights, etc. In terms of cross-border service trade, China has not yet introduced tax policies for the digital economy, but the compliance risks regarding the withholding obligation of value added tax have increased. Under current VAT regulations, only when both conditions are met, including that the seller is located abroad and the service occurs entirely abroad, can it be considered as selling services abroad. Domestic purchasers do not need to withhold and remit VAT on behalf of overseas sellers. In recent years, tax authorities have intensified their efforts to alert domestic enterprises of the risk of value added tax withholding by using the foreign exchange payment information of enterprises transmitted by banks. If the services provided by overseas sellers leave traces within the country, this tax risk will be triggered.
It is worth noting that China has joined the Automatic Exchange of Information (AEOI) advocated by the OECD and formulated the Chinese version of the Common Reporting Standard (CRS) regulations. In September 2018, China exchanged financial account information with other countries and regions that have joined the AEOI for the first time and has since implemented automatic exchanges on a regular basis. According to the official disclosure of the OECD, the most recent exchange occurred in September 2024. The main information of financial accounts opened by foreign enterprises and individuals within the territory of China will be automatically transmitted to their home countries under the CRS rules, and it is necessary to properly handle tax investigations by the tax authorities of the home countries on funds or income derived from China.
Tax administrative reconsideration
As an internal error-correction mechanism within the tax administration system, tax administrative reconsideration serves as a critical legal relief for foreign-invested enterprises in China to resolve tax disputes. When the tax authority makes a decision on tax collection and supplementary payment, the affected entities can usually apply for reconsideration to the immediate superior tax authority. The higher-level tax authority will conduct a review of the decision regarding factual determinations, evidence, application of law, and statutory procedures, and make a ruling.
The State Taxation Administration disclosed that the number of national tax administrative reconsideration cases was 2,088 in 2022, 3,131 in 2023, and rose to 5,243 in 2024. According to the Ministry of Justice’s 2024 national administrative reconsideration statistics, 90.3% of the cases did not enter the administrative litigation or letters and visit procedures after administrative reconsideration. Since this procedure is non-public, the conflicts in tax disputes do not externalise and will not overly intensify the tension between the tax authorities and taxpayers. It has a relatively large flexibility characteristic and the effect of resolving the disputes is more desirable.
It should be noted that, in accordance with the current Tax Collection and Administration Law, before an enterprise applies for administrative reconsideration regarding substantive tax disputes, it must first meet the prerequisite of making up for the tax payment and late payment penalties or providing tax payment guarantees. Otherwise, it does not have the qualification to apply for reconsideration. In March this year, the Ministry of Finance and State Taxation Administration released a draft for public comment on the revision of the Tax Collection and Administration Law, explicitly abolishing the above-mentioned tax clearance rules. The revised draft is expected to be submitted by the State Council to the Standing Committee of the National People’s Congress for review in 2026, with potential approval within approximately two to three years. The abolition of the tax clearance will further activate this procedure, making it truly become the most important legal remedy for enterprises to resolve tax disputes.
Tax administrative litigation
Tax administrative litigation serves as a legal remedy for enterprises seeking judicial review of tax disputes, characterised by strong legal nature, independence, confrontation and openness. However, China’s court system currently lacks specialised tax tribunals, resulting in long-standing deficiencies in judicial resources, capability and expertise for handling tax cases. The ratio of enterprises winning their cases is very low and they often go through first-instance, second-instance, and even retrial procedures.
In January 2025, the Supreme People’s Court announced a retrial case of a tax administrative lawsuit. In 2013, the tax authority made a decision of back-taxes and imposing penalties on an engineering company for underpaying real estate tax. The enterprise began to resort to legal remedies at the end of 2013, but failed in administrative reconsideration, and the first-instance and second-instance of administrative litigation. After the Guangdong High Court rejected its petition in 2017, the company appealed to the Supreme People’s Court. In January 2024, the Supreme People’s Court decided to initiate a retrial of this case and made a retrial judgment in December, determining that the tax collection and penalty actions of the tax authorities were contrary to the objective facts, and violated the principle of proportionality between offence and punishment and protection of reliance. The original judgment and penalty decision were thus revoked. After more than ten years of litigation, the case was finally won.
In summary, enterprises initiating administrative reconsideration or litigation to resolve tax disputes not only need to be prepared for a protracted and tough battle, but also should rely on the professional support of tax lawyers. During the case trial process, it is critical to gain the trust and support of the reconsideration authorities and courts, and to assist judges – particularly during litigation – in discovering, understanding, and applying tax laws, thereby maximising the protection of legitimate rights and interests.
Special tax investigations and mutual agreement procedures (MAP)
In recent years, the Chinese government has actively participated in the BEPS action plan advocated by the OECD, gradually improved the anti-tax avoidance and special tax adjustment rules, and committed to implementing Pillar Two. Multinational enterprises should attach importance to the tax risks of related-party transactions and properly resolve related disputes.
Chinese tax authorities have carried out anti-tax avoidance investigations, with a focus on risk points such as high value of related-party transactions of enterprises, long-term losses, thin profits, leap profits, profit level lower than the industry level, mismatch between profit levels and functional risks, mismatch between shared profits and cost, thin capitalisation, non-compliant preparation of contemporaneous documents, and transactions with low-tax related parties. In the early stage of responding to anti-tax avoidance investigations, it is recommended that enterprises, based on the contemporaneous reports, make statements and defences regarding the two key points of comparability analysis and transfer pricing methods, discussing that related-party transactions comply with the principle of independent transactions, as well as the matching relationship between returns, risks and functions.
In response to the special tax adjustment conclusion issued by the Chinese tax authorities, enterprises can not only resort to legal remedies such as administrative reconsideration and administrative litigation, but may also request their overseas affiliates to initiate a mutual agreement procedure (MAP) through their home country’s tax authorities. While Chinese tax authorities generally refrain from initiating MAP for special tax adjustment cases involving unpaid taxes according to domestic regulations, this is not absolute. As long as the tax authorities of the home country initiate reciprocal anti-tax avoidance investigations against Chinese-funded enterprises and formally request China to initiate MAP under the bilateral tax treaty, it will increase the bargaining chips of the investigated foreign-funded enterprises in negotiations with the Chinese tax authorities and have a greater chance of obtaining the final understanding of the Chinese tax authorities.
Advance pricing arrangements
Foreign-invested enterprises in China with a high dependency on cross-border related-party transactions, may apply to the Chinese tax authorities for signing unilateral or bilateral advance pricing arrangements (APAs), thereby enhancing the certainty of the pricing principles and calculation methods for cross-border related-party transactions. The officially signed APA not only applies to the subsequent three to five years but may also cover related-party transactions from prior years, with a retroactive period of up to ten years.
The negotiation and execution of the advance pricing arrangement consist of six stages, which are pre-filing meeting, letter of intent, analysis and evaluation, formal application, negotiation and signing, implementation and monitoring. It is initiated by an enterprise submitting an application for pre-filing meeting, and the initiation threshold is that the amount of related-party transactions that occurred in each of the past three years is over CNY40 million. Enterprises with related-party declarations, compliant submission of contemporaneous materials, tax credit ratings of Grade A, complete application materials, and renewal, may be given priority for acceptance. For enterprises applying for bilateral advance pricing arrangements, if the overseas tax authorities have a strong willingness to negotiate and a high degree of attention, they may also be given priority in accepting the application.
As of 2023, China has signed 153 unilateral APAs and 143 bilateral APAs, but has not yet signed multilateral APAs. Among these, the proportion of APAs involving tangible assets is as high as 56%, while the proportions of APAs involving intangible assets and labour transactions are 20% and 23% respectively. The proportion of APAs involving financing is only 1%, and the proportion of APAs involving the transfer of financial assets has not yet been signed. In addition, among the bilateral APAs that have been signed, China has signed 99 cases with Asian countries, 27 cases with European countries, 16 cases with North American countries, and one case with Oceanian countries. In terms of signing time, the vast majority of unilateral APAs and half of bilateral APAs are usually signed within 24 months, and nearly half of the number of bilateral APAs take longer than 24 months to sign. From an industry perspective, manufacturing, wholesale and retail, leasing and business services, transportation and postal industry, and information technology services constitute the primary sectors covered by signed APAs, collectively accounting for 97% of the total.
The above data is sourced from the China Advance Pricing Arrangement Annual Report (2023) released by the State Taxation Administration. Such reports are usually released in December each year, and enterprises planning to apply for an APA may take note and refer to them. It is worth noting that the number of renewals of APAs after expiration has been increasing year by year, which reflects the positive role played by APAs in preventing the risk of special tax adjustments. Given that the procedures for negotiating and signing APAs are complicated and the process is lengthy, it is advisable for enterprises to proactively seek assistance from tax lawyers to complete the signing of advance pricing arrangements with professional assistance and support.
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