How to Repair Tax Credit for Companies in China?

The State of Taxation (SAT) in China made an announcement on 1 January 2022 on several issues relating to Tax Credit Evaluation and Repair. Adding provisions to tax repair credit for those enterprises who have serious discreditable behaviors and bankruptcy reorganization was the main focus of the announcement.

How Can a D-Rated Taxpayer Apply for Tax Repair Credit?

All Class D taxpayers that have already fixed their tax credit default issues can apply for this benefit if they have no recent records of default in regards to their tax management system over a period of the previous 6 to 12 months.

Four Specific Application Types:

  1. Taxpayers who are deemed as major tax violators and defaulters with a tax credit that is ranked at D-grade.

    Application rules: Any information on the defaulting subject that is now is now barred from being published in adherence to the provisions laid out by the State Administration of Taxation and when there is not a recent record of their tax credit and default details that covers 12 consecutive months before they even applied.
  2. Taxpayers with a D-grade because of tax credit judgments because of other non-compliance.

    Application rules: This covers those who have fixed their tax credit default issues and covered their tax legal responsibilities that don’t have any recent records of tax credit defaults over the past consecutive 12 months before they applied.
  3. Taxpayers that have tax credit for the current 12 months that have been ranked at D-grade because of being awarded that grade for the tax credit from the previous 12 months.

    Application rules: Those who have covered their tax legal responsibilities and corrected their tax default credit, or even those where the information on the defaulting subjects has ceased to be or withheld and not published because of regulatory requirements of the State Administration of Taxation and have no recent records of defaulting on tax credit over the previous 12 months before application.
  4. Enterprises that are run or registered by a person or people who are responsible directly for tax credit D-grade taxpayers and now have a D-grade tax credit because of association.

    Application rules: No recent record over the past 6 consecutive months of tax credit default before the application is made.

Good Policy & No Penalties for First-Time Offenders

The evaluation of the tax credit level takes place after the tax year and the tax regulation authorities have decided upon the previous year’s results of the tax credit evaluation every year in April.

When evaluating the tax credit rating in 2022 for the year 2021, the State Administration of Taxation No.31 provisions of 2021 will be implemented. And in this case, the taxpayer’s tax credit rating and its “first-violation impunity” will still remain in place.

The State Administration of Taxation states that the “first-violation impunity” rule is the exemption from the punishment that taxpayers get for some first-time minor tax law violations that have been swiftly corrected and did not cause any harm.

The “first-violation impunity” provision means that the taxpayer is not subjected to penalties so in effect those records are not included when the tax credit evaluation takes place.

To be eligible for the first offense without penalty provisions, you must adhere to the following conditions and criteria:

  • This is the first time that the taxpayer in question or a withholding agent is guilty of something that is listed on the First Office Impunity List.
  • That the results are minor and have caused minimal to no harm.
  • They have taken the initiative to correct and fix the issues before the tax regulators find out or within a stated period laid out by the tax authorities to fix the problem.

The rules of the first-violation impunity provision are clearly defined on the “First Violation Impunity List”. It comes in two batches that cover 14 items that include issues pertaining to minor tax violations such as tax declaration, ticket management, and info submission.

Tax credit is generally not affected by the first-violation impunity provision and the tax credit evaluation. But it’s recommended that you do not take a chance in regard to this issue just because it’s the first time you have mixed a tax payment or owed the tax authorities, as you could still receive punishment and it can affect your tax credit in some way.

Tax evasion and failing to pay or even underpaying your tax are not covered by the “first- violation” provision according to the Tax Collection and Administration Law. Because the first violation can have a knock-on effect on late payment, tax credit points, and even fines, all companies should be careful and pay attention.

Foreign investors and foreign taxpaying individuals can find China’s tax system a tad confusing and complicated concerning compliance. The main issue of concern is that dealing with a tax audit can require a very high level of expertise and comprehension in China that most companies and individuals do not have. The general focus of these tax audits is to validate or appropriate tax treatments for specific items that might pertain to “material” tax impacts.

It’s important to have specialist expertise on your side when trying to understand and comply with the laws and dealing with tax officials in China. Experienced China tax law specialists can help you to prepare all the relevant things for your tax audit or help you to deal with the said officials. Identifying the potential tax risks beforehand and having all your ducks in line is essential, so make sure you get the right help you need to ensure everything runs smoothly and above board.

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