Big data revolution in taxation – How big data changes China’s tax collection system?

The implementation of the Golden Tax III project, which was initiated by the Chinese State Administration of Taxation (SAT) in 2008, had been accelerated in 2016. This project aims to centralize the tax information IT system in order to provide a nationwide standardized tax administration and data processing procedure. It helps the SAT to identify potential tax risks earlier and tighten the tax collection regime in China. It also enhances the coordination and communication between the SAT and local tax authorities (LTA s). Furthermore, these measures will simplify the reporting procedures for taxpayers. The Golden Tax III project is interwoven with the improvement of the CTAIS as well as with the VAT Administration Information System and will have a significant impact on the tax liability assessment of individuals, Chinese locals or expatriates. The following article will introduce the resulting implications to provide you with a better understanding of the IT-based taxation system in China.

VAT Administration Information System

The VAT Administration Information System consists of six sub-systems. After a seller issues an output invoice, he is required to report the invoice information electronically via the (1) invoice issuance sub-system, from where it is sent to the (2) VAT filing sub-system. During this process, the invoice information is reported to the tax authorities and recorded.
Meanwhile, the buyer has to upload the invoice copy on to the (3) VAT e-certificate system. In case this system detects some mismatches or wrong cipher, it will be reported to the (4) invoice crime investigation sub-system for further investigation.
Otherwise the invoice information will be forwarded to the (5) cross-checking sub-system, where it will be cross-checked with the information in the seller’s invoice. If mismatching or any irregularity is detected, the information will be sent to the (6) verification sub-system. Afterwards, if the suspicion of fraud is confirmed, it will be sent to the (4) invoice crime investigation sub-system for further investigation.

In 2016, the electronic filing of VAT invoices had been rolled out nationwide. Output and input VAT invoices now have to be filed electronically. The output VAT invoices have to be updated immediately after being submitted to the national VAT information database, supervised by the SAT, to provide the LTBs with a comprehensive overview when the taxes are filed for invoice verification and tax source administration. The output VAT taxpayer  has to match the content of the  invoice to that stipulated in the “Catalogue and Code of Taxable Goods and Services”, in order to make it more convenient for the tax authority to analyze, calculate and identify tax risks. The system also provides more convenience to input taxpayers. Eligible taxpayers of grade A and B (China has a tax credit rating from A – D; the classification of the taxpayer depends on e.g. product, cooperation with the tax authorities, or availability of information etc.) are currently not subject to the input VAT verification and can log the claim for refund directly into the system.

This system provides local and state tax bureaus with a flexible and efficient instrument to identify tax risks and any kind of fraud regarding VAT invoicing. It also reduces the costs incurred during tax collection and provides a better service to taxpayers in China.

VAT Filing System Overview

The China Tax Administration Information System (CTAIS)

The information, collected through the VAT Administration Information System, is an important part of the CTAIS. The CTAIS collects big data of taxpayers in China from all available sources. Beside the VAT Administration Information System, these sources include state tax bureaus, local tax bureaus, public security bureaus (PSB), social welfare offices (SWO), data from customs, Ministry of Commerce (MOFCOM), State Administration of Industry and Commerce (SAIC), State Administration of Foreign Exchange (SAFE) and other authorities.

Information will be gathered and exchanged online among the institutions mentioned above and therefore, the information has to be filed online and digitally. In other words, less paper-based filing is the future.

The aim of improving and expanding the China Tax Administration Information System is to be able to identify tax risks and to inform the taxpayer in real time. It also provides the local tax bureaus with the possibility to choose, with more selectivity, those enterprises with higher risks for audits. Consequently, the Chinese tax authorities can use their resources more efficiently for investigations; and as an enterprise it is less likely to be chosen randomly for an audit by the authority if its tax risk indicators shown in the available data are low.

Impact on Individual Taxpayers

While the Golden Tax I and II projects mainly concern the improvement of VAT reporting procedures, the Golden Tax III project aims to build an effective controlling system which integrates all industries, tax categories and taxpayers. It not only affects corporates, but especially individual tax payers. Under the new regulations, individuals are obliged to provide more detailed information than before when registering as taxpayers. The tax bureaus will have a better insight and more tools to assess the tax liability of individuals. Moreover, the disclosed information will be entered into a system, where it is cross-checked with information of other taxpayers of similar industries and positions to detect unreasonably high or low salaries. Expatriates in particular are required to disclose information about benefits in kind, such as housing allowance or other services. Again, the data will be transmitted to a national database, where local tax authorities can cross-check if an individual’s benefits are in line with what the norm is in the market.

Conclusion

The Chinese Tax Administration System is in transition. The digitalization and the use of big data is the future and will be advanced by the SAT. For a company doing business in China, it is important to review the internal control systems in regards to VAT, reporting and filing deadlines and other related compliance. Through these reforms, the authorities have new tools to observe the adherence to the rules mentioned above and to penalize if they are not met.
Furthermore, the implementation does not have the same pace nationwide. Chinese tier-1 cities such as Shanghai and Shenzhen have implemented Golden Tax III earlier than other districts. It is important to liaise with the local tax authorities on filing and implementation issues.

For further information about internal control systems and filing procedures, please contact Sam Kung (sam.kung@cwhkcpa.com)  in Hong Kong or Charles Jiang in mainland China (charles.jiang@cwhkcpa.com).

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