In order to limit tax bureau intrusions on taxpayers, the State Administration of Taxation (“SAT”) recently issued a notice3 to restrict the power of tax authorities to c onduct field investigations.
The notice prohibits tax officials from entering a taxpayer’s place of business or production to conduct a field investigation if it can be avoided or is not necessary. Except for “illegal tax cases”4 and “special investigation matters”, tax officials may not enter the same taxpayer’s place of business or production twice during one calendar year to conduct a tax audit. The notice does not define the terms illegal tax cases and “special investigation matters”. However, the terms are generally understood to refer to tax evasion and do not include tax avoidance. The notice also provides that tax officials in principle may not enter the same taxpayer’s place of business or production twice to conduct an anti-avoidance investigation on the same matter.
Notably, in the following situations, tax officials may not enter a taxpayer’s place of business or production under any circumstance and may only request documents:
To review the treaty benefit application of a non-resident enterprise; and
To review tax reporting by a non-resident enterprise that indirectly transfers a PRC enterprise.
These restrictions provide welcome news for multinational companies that indirectly acquire PRC companies. Multinational companies are often concerned that their indirectly acquired PRC subsidiaries will be harassed by PRC tax authorities if the offshore sellers do not pay the taxes for the indirect transfers. However, it remains to be seen whether local tax authorities will fully implement the notice and restrain their investigative powers in practice. Coupled with other legislative developments in recent years, this notice is part of a trend in China towards more transparent and uniform tax administration and enforcement, greater protection of taxpayerrights, and more limitations on the discretionary powers of local tax authorities