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Update on Penalties for First Violations of Chinese Tax Rules

The Chinese State Council Standing Committee, the State Administration of Taxation (SAT) issued Announcement [2021] No. 6 (Announcement 6), which took effect on April 1, 2021 and modifies regulations related to penalties for first-time violations of tax compliance rules.

Authored By

Ms Flora Luo

Director of Global Expansion & Tax Advisory

Nexia TS Shanghai

floraluo@nexiats.com.cn

Dr Scott Heidecke

Senior Consultant

Nexia TS Shanghai

scott@nexiats.com.cn

In order to support the tax system reform goals of the Chinese State Council Standing Committee, the State Administration of Taxation (SAT) issued Announcement [2021] No. 6 (Announcement 6), which took effect on April 1, 2021 and modifies regulations related to penalties for first-time violations of tax compliance rules. In accordance with the most current relevant laws and regulations, the announcement provides that no administrative penalties will be imposed for first-time tax violations, as long as the violations arise from matters listed in the announcement and the resulting harmful consequences are minor. Violations must also be self-corrected before the matter comes to the attention of tax authorities or corrected within the time limit requested by tax authorities.

The following list describes the matters for which Announcement 6 applies:

  1. A taxpayer fails to report all bank accounts to the tax authorities in accordance with the relevant provisions of the Tax Collection Administration Law and Regulations;
  2. A taxpayer fails to set up and keep accounting books or keep accounting vouchers and related information in accordance with the relevant provisions of the Tax Collection and Administration Law and Regulations;
  3. A taxpayer fails to file tax returns and report tax information within the time limits specified in the relevant provisions of the Tax Collection Administration Law and Regulations;
  4. A taxpayer who uses tax control devices to issue invoices fails to report invoicing data to the competent tax authorities in accordance with the Tax Collection and Administration Law and Implementation Rules, Invoice Management Measures, etc., as long as the taxpayer has no illegal income;
  5. A taxpayer fails to obtain or manage invoices in accordance with the Tax Collection and Administration Law and Implementation Rules, Invoice Management Measures, etc., and has used other vouchers instead of invoices, as long as the taxpayer has no illegal income;
  6. A taxpayer fails to setup its withholding obligation or collect withholding tax, or keep withholding and tax collection vouchers and related information in accordance with the relevant provisions of the Tax Collection Administration Law and Regulations;
  7. A taxpayer fails to manage its withholding tax obligations and payments in accordance with the time limit of the relevant provisions of the Tax Collection Administration Law and Regulations; or
  8. A domestic institution or individual that contracts engineering operations or labor projects with non-residents fails to report relevant matters to the competent tax authorities in accordance with the Provisions of the Interim Measures for the Administration of Taxation of Non-resident Contracted Works and the Provision of Labor Services.

The provisions of Announcement 6 may benefit newly registered foreign-invested companies, especially where they have little to no experience with China’s tax compliance regulations and/or make use of accounting services provided by domestic companies that are not accustomed to handling foreign-invested company compliance activities. Foreign individuals working in China may also benefit, as China’s individual income tax rules and processes in some instances can be quite complicated or unclear with respect to tax filing deadlines.

While Announcement 6 brings welcome changes to China’s tax penalty practices, it remains to be seen how in-charge tax authorities will decide whether the consequences of qualifying non-compliance issues are minor. As with many tax rules, definitions of terms are often subject to individual interpretations by a given tax official. It is therefore strongly suggested that newly formed foreign-invested entities or foreign individuals working in China for the first time work with a knowledgeable tax agency to set up and/or manage tax compliance systems and practices.

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