Laws of the People's Republic of China

Notice of the State Administration of Taxation on Doing a Good Job in Evaluating the Income Tax Payment of Foreign-funded Enterprises and Foreign Enterprises

Guo Shui Han [2005] No. 449

The state taxation bureaus of all provinces, autonomous regions and municipalities directly under the Central Government and the cities under separate state planning and the local taxation bureaus of Guangdong Province and Shenzhen Municipality:

Recently, the State Administration of Taxation has distributed the Measures for the Administration of Tax Payment Evaluation (for Trial Implementation) (Guo Shui Fa [2005] No. 43, hereinafter referred to as the Measures for the Evaluation of Tax Payment), which has uniformly regulated the means and measures for the evaluation of the payment of various taxes. In particular, it has clarified the analysis indexes and the instructions thereof for the evaluation of the income tax of foreign-funded enterprises and foreign enterprises (hereinafter referred to as the foreign¨Crelated enterprises). In order to effectively do a good job in the evaluation of the income tax payment of foreign-related enterprises, we hereby notify the relevant issues as follows:

I.

Basic Requirements

Since 1998, in order to strengthen the administration of the income tax of foreign-related enterprises, the tax authorities at all levels have successively carried out comparatively standardized measures concerning the settlement and payment, examination and evaluation of taxes and tax audit on foreign-related enterprises and have, at the same time, tried out the measures of joint tax audit on those foreign-related enterprises with trans-regional business operations. The practice of all these years has proved that the aforesaid measures are effective means to strengthen the administration of tax sources. With the incessant elevation of the computerized administration of tax collection, it is necessary to form a working system with the information pool, orderly operation and mutual promotion for the administration of the income tax of foreign-related enterprises so as to form a resultant force of administration by means of integrating administrative resources and further enhance the work efficiency. Therefore, all regions shall regard the popularization of the evaluation of tax payment as an opportunity, organically blend the aforesaid measures for administration so as to make good use of their respective advantages and avoid any conflict with each other or any overlapping work in the evaluation of tax payment.

1.

Including the examination and evaluation of taxes into the standardized evaluation of tax payment. The Measures for the Evaluation of Tax Payment are a more standardized work procedure and a more scientific analysis index system designed on the basis ofsummarizing the examination and evaluation of the taxes of foreign-relatedenterprises that are pointed to those weak links arising in the administrationof tax sources in recent years and which also set a higher requirement for an in-depth analysis on the declared materials. Therefore, the evaluation of tax payment is also an extension of the examination and evaluation of taxes and all regions shall include the examination and evaluation of taxes into the evaluation of tax payment.

2.

Combining the settlement and payment of the income tax of foreign-related enterprises with some of the links in the evaluation of tax payment. The settlement and payment of the income tax of foreign-related enterprises shall not only include filling in an annual declaration form and paying its taxes in a timely manner by the enterprise, but also include carrying out a general examination on the enterprise¡¯s annual declaration forms and other relevant materials and handling the refund of overpaid annual income taxes and repayment of any deficiency by the tax authority. Therefore, the same requirements shall be applicable to the general examination and the preliminary evaluation of tax payment and desk analysis in the work of settlement and payment, so that they shall be carried out in a combined manner.

3.

Taking the foreign-related tax audit as an important means of the evaluation of tax payment. The Audit Procedures for Foreign-related Tax (hereinafter referred to as the Audit Procedures) has embodied the modern auditing techniques and scientific working procedures and is a forceful means to carry out the daily inspections and provide high-quality services to the foreign-related enterprises for the tax authorities, so that all regions may continue to bring the function of foreign-related tax audit into play and do a good job in promoting the Audit Procedures. In order to enhance the capability of the qualitative and quantitative judgment on the authenticity and accuracy of the tax declaration, the modern auditing techniques shall be applied to the link of desk analysis and the link of on-site investigation and verification as well so as to organically combine the evaluation of tax payment and foreign-related tax audit in the evaluation of the income tax of foreign-concerned enterprises,.

4.

The tax authority at a higher level may be responsible for the evaluation of the income tax of large-scale foreign-related enterprises. As the organizational structure and business operations of large-scale foreign-related enterprises, especially those that have trans-regional operations, are comparatively complicated, more standardized technical means shall be adopted in the implementation of the evaluation of tax payment and the coordination of the tax authority at a higher level is needed for. According to the requirements as prescribed in Article 3 of the Measures for the Evaluation of Tax Payment by all regions, for the purpose of evaluating the tax payment of those large-scale foreign-related enterprises, if the desk analysis and on-site investigation and verification are needed, the administrative department of international (foreign-related) taxation of the tax authority at a higher level in all regions shall take charge of the organization and implementation based on the preliminary evaluation by the tax authority at the grass-root level.

II.

Concrete Work

As the administration of the income tax of foreign-related enterprises has a strong policy meaning, covers many aspects and boasts a comparatively large number of work links, for which an annual settlement and payment shall be carried out and the daily examination shall be conducted according to the Audit Procedures, we should, on the basis of an organic combination of the aforesaid work, do a good job in the relevant links in the work of the evaluation of tax payment.

1.

The preliminary evaluation of tax payment. The preliminary evaluation shall refer to the procedure to carry out a general examination on the accuracy of the declaring materials concerning the settlement and payment of the income tax of foreign-related enterprises. In this phase, we should put emphasis on collecting and sorting out the declared information of taxpayers in all aspects on the basis of ensuring the accuracy of the logical relationship within the declaration forms, and provide the source materials for forming the basic data. All regions shall, before the end of May, carry out a preliminary appraisal and verification on the declared materials of those foreign-related enterprises that have participated in the settlement and payment and shall put emphasis on the examination in the following aspects:

(1)

Whether or not all items of declared materials are complete and ready; whether or not the declared data is in conformity with that of tax payment.

(2)

Whether or not the main form of those declare forms of tax payment, the items in the annex form and the numbers as filled therein are complete; whether or not the applicable tax items, rates and the calculation of numbers in all items are accurate; whether or not the logical relationship between the main form and the annex form and between numbers and items is correct.

(3)

Whether or not the affiliated materials of tax declaration, namely, the formalities for declaration and approval, are authentic, accurate and legal; and

(4)

Whether or not the difference between the number of tax declaration and that of accounting statements and the reason thereof, and the adjustment of incomes, expenses, profits and other relevant items are in conformity with the provisions of laws and regulations on tax collection.

2.

The desk analysis of the evaluation of tax payment. The desk analysis shall refer to the procedure to carry out an examination on the reasonableness of declared materials concerning settlement and payment by using the evaluation and analysis index for the income tax of foreign-related enterprises and the instructions thereof. In this phase, an evaluation of the current tax payment as declared by the taxpayer shall be carried out to the tax-related information in the daily administration and, where any questionable point is founded, an on-site investigation and verification shall be initiated, which may be carried out in the process of settlement and payment or after the settlement and payment is concluded. The specific requirements are as follows:

(1)

The main objects of examination. We should conduct examination focused on the following enterprises. large-scale foreign-related enterprises, profit-losing enterprises, enterprises of tax exemption, enterprises of tax reduction, zero-declaration enterprises, the enterprises with comparatively low tax rate,the enterprises with trans-regional operations, the enterprises with comparatively low profitable rate and the enterprises with associated transactions.

(2)

Measures for examination. We should make full use of the general analysis indexes and the analysis indexes and the instructions thereof concerning the income tax of foreign-related enterprises in the Measures for the Evaluation of Tax Payment and at the same time, we may use the measures for analytic review in the Audit Procedures to make an analysis on relevant indexes on the tendency and rates as well as a comparison, find out those fields where any problem may exist, and provide clues for negotiation and on-site investigation and verification and initiating an on-site investigation and verification.

(3)

The on-site investigation and verification for the evaluation of tax payment. The on-site investigation and verification shall refer to the procedure to carry out an on-site examination on the authenticity of the materials as declared by a taxpayer in terms of those questionable points as found in the phase of desk analysis. The on-site investigation and verification shall be conducted after the work of settlement and payment is concluded. The relevant techniques and requirements regarding on-site auditing in the Audit Procedures shall be applied to those foreign-concerned enterprises that have a comparatively mature financial and accounting system and a comparatively large operating scale so as to enhance the technical content in the investigation and verification. At the same time, with regard to the evaluation of the tax payment for those foreign-related enterprises that adopt an across-region operational mode and pay their income taxes on a consolidated base, if an on-site investigation and verification is needed, it shall be conducted according to the requirements of the Interim Measures for Joint Tax Audit on Foreign-related Enterprises as distributed by the State Administration of Taxation.

(4)

The transfer of cases concerning the evaluation of tax payment. For any irregularity acts concerning tax collection or tax evasion that shall be transferred to the tax investigation department and the administrative department of international taxation according to the requirement of Measures on Evaluation of Tax Collection, all regions shall do a good job in transferring the working manuscript of the evaluation of tax payment, data and materials. The State Administration of Taxation shall formulate concrete work procedures for transferring cases based on the summarized experiences from different regions,. Where any doubtful point concerning tax evasion of enterprise has been found before the on-site investigation and verification of the evaluation of tax payment, the administrative department of international taxation at any level may carry out the anti-tax-evasion investigation in the phase of the investigation and verification of the evaluation of tax payment.

III.

Measures for Guaranty

The evaluation of tax payment is an important measure to strengthen the administration of tax sources, lower taxation risks and optimize the services of tax payment. All regions shall regard the evaluation of tax payment as an important means to strengthen the administration of the income tax of foreign-related enterprises and effectively enhance the quality of work.

1.

Strengthening the leadership and clarifying functions and duties. According to the provisions of the Measures for the Administration of the Evaluation of Tax Payment, the administrative departments of international (foreign-related) taxation of the tax authorities at all levels shall be responsible for the supervision and control on the industry tax of the income tax of foreign-related enterprises, for the establishment of index system for the evaluation of tax payment, for the calculation of early warning value of index, and for the formulation of the specific evaluation measures, and shall provide the basis and guidance for the implementation of the evaluation of tax payment of the tax authorities at the grass-root level. Therefore, the tax authorities at all levels shall strengthen their leadership over the evaluation of the income tax payment of foreign-funded enterprises and the administrative departments of international (foreign-related) taxation at all levels shall take effective measures to perform the aforesaid duties.

2.

Actively piloting and improving the indexes. The analysis indexes and how to use them in evaluating the income tax payment of foreign-related enterprises as affiliated to the Measures for the Administration of the Evaluation of Tax Payment is abstracted on the basis of summarizing the experiences of some provinces and municipalities. As there exist differences in the aspect of registered capital, operating scale, industrial features and financial management, etc. whether they are scientific and reasonable or not shall be testified by more practice. Therefore, all regions shall, on the basis of making full use of the present indexes system, pay more attention to collecting and reporting the problems as found in the practical operations to the State Administration of Taxation timely so as to provide a decision-making basis for establishing and improving a more scientific and reasonable indexes system. The State Administration of Taxation shall, on the basis of summarizing the experiences of all regions, formulate specific measures for the evaluation of the income tax payment of foreign-related enterprises.

3.

Intensifying examination and enhancing performance. Before the end of each year, all regions shall make a written summary on the evaluation of the income tax payment of foreign-related enterprises (including the general situation, existing problems and the opinions and suggestions for resolution), fill the Statistic Form for the Evaluation of the Income Tax Payment of Foreign-related Enterprises (See attachment) and report it to the State Administration of Taxation (department of international taxation). The State Administration of Taxation shall make assessment on the work of all regions and circulate it. At the same time, all regions shall establish a working system for level-by-level assessment and regard the evaluation of tax payment as a main content of the annual work assessment.

Attachment: Statistic Form for the Evaluation of the Income Tax Payment of Foreign-related Enterprises

State Administration of Taxation

May 17, 2005

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Attachment:

Statistic Form for the Evaluation of the Income Tax Payment of Foreign-related Enterprises

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¡¡¡¡Name of the declaration entity:                                      Year:                               Unit: 10,000 yuan

¡¡¡¡Note: 

¡¡¡¡This form shall be reported together with the annual work summary of the evaluation of the income tax payment of foreign-related enterprises both in the form of paper version and the electronic version (created in EXCEL files)

¡¡¡¡The line of "Adjustment of Decrease" shall be filled with negative numbers. For the line of "Net Increase(Decrease)", in the case of any net decrease, it shall be filled with a negative number.

¡¡¡¡Where the preliminary evaluation and desk analysis are carried out together, the relevant data may be filled in the line of "Desk Analysis" in a united manner.