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Tax Control Framework in China

A cooperative tax compliance agreement between the taxpayer and the tax administration is encouraged

Key Facts
  • TCF ensures the efficient control and management of taxation, and prevent damage to financial goals and corporate image
  • China's tax authority controls the taxpayer's tax risk via investigating the implementation of the TCF
  • Compliance agreement is not yet available for companies not classified as a “large business”
  • Tax authorities in eastern China have been issuing guidelines for the MNEs within their jurisdiction to include cross-border tax risk management in the internal tax risk management system
  • Digitisation: the concept of big data stirred up new thinking in taxation administration and risk management

National rules in respect of a Tax Control Framework, differences due to size

China’s State Administration of Taxation (SAT) established the Large Business Taxation Department in 2008. The Department is seeking to develop a new approach to supervise taxation and control the company tax risk via TCF. SAT issued two circulars on the TCF in 2009 and 2011 respectively. The circular issued in 2009 introduced a guideline on TCF for large businesses and suggested a set of key elements for the internal TCF system.

Another circular issued in 2011 is on the tax administration of large businesses. This circular specified the definition of a large business as being the group companies earmarked by SAT and the tax authorities at the provincial level. Some provincial tax authorities have rolled out their own regulations for the administration of local large businesses.

Benefits for the taxpayer resulting from a TCF

A well-established TCF system is beneficial for taxpayers in that it could help ensure the efficient control and management of taxation, and prevent damage to financial goals and corporate image. The tax bureau regularly evaluates the implementation and effectiveness of the TCF and passes the questions it discovers to the taxpayer. Further, companies with TCF system are more likely to be granted advance rulings for specific tax issues.

Are the tax authorities bound to check or consider the TCF?  If yes, also for past years?

China’s tax authority encourages the taxpayer to set up a TCF but does not make it mandatory. The tax authority controls the tax risk via investigating the implementation of the TCF. 

TCF is an important factor in the company’s tax risk management work. Therefore, tax auditors will consider the TCF in their practical work to determine how to conduct the investigation work on the company, though TCF does not offer any statutory protection.

Cooperative compliance – is it agreed by the fiscal authority? Cross-border applicability of cooperative compliance

A cooperative tax compliance agreement between the taxpayer and the tax administration is also encouraged. Starting from 2012, signing of the tax compliance agreement was gradually implemented, firstly done by SAT with large businesses and later extended to provincial-level tax authorities. Such a compliance agreement is still not yet available for companies not classified as a “large business”.

No cross-border cooperative compliance request has yet been formalised. Nonetheless, some local provincial tax authorities have taken initiatives during their management of tax issues dealing with large multi-national enterprises (MNEs). For example, some tax authorities in eastern China have been continuously issuing guidelines for the MNEs within their jurisdiction to include cross-border tax risk management in the internal tax risk management system.

Are there any rules regarding digitisation of tax processes?

China has also invested substantial resources in promoting tax process digitisation. Most tax compliance tasks now can be completed online, even on a mobile phone. In addition, the concept of big data also stirred up new thinking in taxation administration and risk management. It is foreseeable that digitisation will be a phenomenal trend under which the details of tax matters will become more transparent, and the prediction and identification of tax risks will be made possible at an earlier stage. 

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Tax Control Framework
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