China's State Administration of Taxation (SAT) has announced the launch of an Enterprise Income Tax (EIT) compliance risk notification system by releasing The Public Notice on Matters Relating to Enterprise Income Tax Compliance Risk Notification Service for Taxpayers (SAT Public Notice [2017] No.10, "Notice 10")

According to Notice 10, released on April 18, the risk notification system will be embedded in the annual EIT online filing system. Taxpayers may choose to use the services available in the risk notification system to assess the compliance risk associated with their EIT filings. The SAT believes that this system will help taxpayers enhance their EIT compliance and reduce risks of violating EIT laws and regulations.

Key features

The new risk notification system introduced by the SAT is an online tax information analysis tool that can review the taxpayers' filing data, and highlight potential compliance risks based on existing EIT laws and relevant regulations. According to Notice 10, the review scope of the EIT risk notification system covers logics of tax payable calculation, reasonableness of data provided and relationship between tax amount and financial indicators. The assessment will be based on more than 200 prescribed indicators related such factors as to basic financials, tax policy requirements, quarterly pre-filing records and other non-EIT records.

The new system proposed by Notice 10 will be activated and made available by early May 2017, but there could be timing differences for different locations. Taxpayers who have submitted their online EIT filing package before May will not be able to use the services of the new system

Together with Notice 10, the SAT released an official explanation that further elaborates the risk notification system. In it, the SAT highlighted that:

  • The risk notification system will be available to all taxpayers who file EIT returns based on actual profits (in contrast to EIT filing based on deemed profits).
  • The risk notification system is made available as a service to taxpayers, rather than being a compulsory step in online EIT filing. Taxpayers may choose to use the risk notification system at their own discretion, after completing the EIT online filing package and before formal submission.
  • The use of the risk notification system will not change taxpayers' rights and obligations in EIT compliance, and the assessment result provided will not be binding on the tax authorities.

Comments

The launch of the risk notification system is a milestone in the SAT's effort to improve and enhance EIT compliance. For taxpayers who file EIT in China, using this risk notification system should become part of the best practice of annual EIT filing.

While the reliability of the risk notification system's assessment result is yet to be tested in practice, it is clearly useful as a tool for taxpayers to review their annual EIT filing package and assess potential tax audit risk. Based on the risk assessment results provided by the system, taxpayers may choose to revise their filing data, or include supplementary supporting information. Taxpayers may use the system as many times as needed.

At the same time, the new system is expected to release resources of local tax officials from burdensome reviews of EIT tax returns, and help focus more resources on taxpayers with higher compliance risks. It is expected that EIT filings that have not been through the risk notification system will be put through the system by local tax officials, and are more likely to be picked up for audits as high risk filings.

In this context, that is, appearance may matter. While the new system is presented as a voluntary tool, taxpayers may also wish to consider how their tax filings will be perceived by local tax authorities when they choose not to use the tool.