On June 19, 2016, the SAT replied to the Beijing tax authority’s request for instruction on a tax evasion case through Shui Zong Han [2016] No. 274.

Beijing JLY Plastics Co., Ltd (“JLY”) had deducted before EIT commercial insurance expenses paid for its management personnel, contravening the specific limitation under EIT law.

Evidence revealed that (i) the tax authority had not carried out any other inspection of JLY, (ii) the tax authority had not found any other misconduct attributable to JLY,and (iii) JLY had correctly withheld individual income tax on its commercial insurance expenses.

The SAT concluded that JLY did not have the subjective intent to engage in tax evasion and, therefore, its misconduct could not be considered as such.

This new reply is in line with the SAT’s criterion in its previous replies (Guo Shui Ban Han [2007] No. 513 and Shui Zong Han [2013] No. 196), in which SAT reiterated that subjective intent is an essential and necessary component of tax evasion, requiring that the local tax authority produce relevant evidence to prove the taxpayer’s intent.

In practice, local tax authorities are known to hold differing opinions on whether subjective intent is a component of tax evasion, and they interpret tax evasion differently.

In  particular,  some local  tax  authorities interpret  that  subjective intent  is not specifically required according to the definition of tax evasion under the Tax Collection and Administration Law —stating that tax evasion means that a taxpayer forges, alters, conceals or, without authorization, destroys accounting books or vouchers, overstates expenses, omits or understates income in the accounting books or, after being notified by the tax authorities, refuses to submit a tax declaration or submits false declarations resulting in failure to pay or underpayment of taxes.

The SAT’s reply to JLY’s case, presenting the SAT’s position on this matter again, will hopefully be used by the local tax authorities as a reference in tax inspection and increase predictability and legal certainty in cases of tax evasion.

Date of issue: June 19, 2016. Effective date: June 19, 2016