It is reported that the SAT has selected certain industries to be the main targets for tax audits in 2014:

  1. Directive Target Industries
    1. Real estate developers and construction enterprises
    2. Pharmacy distribution enterprises
    3. Transportation enterprises
  1. Instructive Target Industries
    1. For-profit medical institutions
    2. For-profit educational institutions
    3. Individuals with annual income over RMB120,000
    4. Non-resident enterprises
  1. Other Industries as determined by the local tax authorities
    1. Enterprises with three consecutive annual losses
    2. Enterprises which classified as key tax sources but have not been audited for more than three years

KWM Comments:

In the beginning of each year, SAT would determine the main industries to be audited for the current year. “Directive target industries” refer to those that must be selected as key targets for tax audit of the current year. For “instructive target industries” and “other industries to be determined by the local tax authorities”, although there is no mandatory requirement to carry out tax audits on such industries, they reflect the SAT’s instructive opinion to perform tax audits. As such, regardless of whether an industry is characterized as “directive”, “instructive” or “others to be determined by the local tax authorities”, it would face a relatively higher risk for tax audit in 2014. The relevant enterprises should pay special attention to tax compliance matters, rectify incorrect or inappropriate tax treatments, grasp the key points for tax audit and attend to tax audit carefully in order to mitigate tax risks.

We noticed that the non-resident enterprises have been selected as main tax audit target every year since 2010. This is in line with the trend of the recent years where the SAT has continuously strengthened its efforts on the administration of non-resident enterprises and the crackdown on tax-avoidance transactions. It is anticipated that the China tax authorities would continue to enforce the tax rules issued in recent years for the administration of non-resident enterprises, , such as circular 698 filing for indirect share transfer, the application for treaty benefits, the determination of tax residency for offshore enterprises, and the assessment of permanent establishment under the secondment arrangements, etc., step up its efforts on tax administration, and in the meantime, may explore new tax policies for the administration of non-resident enterprises. KWM will continue to keep you informed of the new development in this respect.