This article was first published in the March 2013 International edition of Accounting and Business magazine.
Along with the accelerating development of China’s socialist market economy and the establishment of a modern enterprise system, internal controls have become a concern in theoretical and practical circles. The government is actively formulating policies and regulations to promote their implementation. However, internal tax risk controls, an indispensable part of enterprises’ internal risk control systems, have been given inadequate attention compared with financial and operational risk controls. China lacks policies and regulations governing the assessment and building of the tax risk mechanism in enterprises.
China began implementing tax risk management later than developed countries. On 5 May 2009, the State Administration of Taxation (SAT) issued the Guidelines on Tax Risk Management in Large Enterprises (Trial) (the ‘Guidelines’) to guide large enterprises in their tax risk management, prevent violations and ensure tax compliance.
The Guidelines clarify issues concerning risk management systems and objectives of large enterprises, their tax risk management organisations, positions and duties, the mechanism and methods for the identification and assessment of tax risks, the mechanism and measures for control of and response to tax risks, tax information management systems and communication mechanisms, and mechanisms for the supervision and improvement of tax risk management.
However, the said document was issued as ‘guidelines’ instead of ‘rules’ or ‘measures’. We understand that the Guidelines impose no mandatory compliance requirement on large enterprises, but only suggest that large enterprises establish relevant tax risk management systems by reference to the Guidelines in combination with their own operations, tax risk characteristics and established internal control systems. We also learn that, in practice, with the promulgation of the Guidelines, many large enterprises, especially selected large enterprises under the direct administration of the SAT and selected enterprises under the direct administration of the provincial-level tax authorities, have started to establish or have established internal control systems targeting their own tax risks.
Controlling tax risks
These systems cover an arrangement of the enterprise’s business process, determination of the points of tax risks, establishment of the tax management organisational structure, clarification of the duties and preparation and creation of the tax development strategy, tax management methods and tax management operational manual for the purpose of establishing the mechanisms for the identification, assessment and control of tax risks.
Two years after the release of the Guidelines, the SAT issued the Taxation Services and Management Procedures for Large Enterprises (the Procedures) on 13 July 2011. The Guidelines target taxpayers, while the Procedures aim at tax authorities, requiring tax authorities at various levels to provide tailored tax services and management for large enterprises based on the demands of taxpayers and the requirement of risk control so as to maintain scientific, efficient, unified and professional services. The purpose of the Procedures is to prevent and control tax risks, improve tax law compliance and reduce tax compliance costs through effective compliance guidance, control and response.
Given the long-standing mistrust and opposing and concealing relationship between tax authorities and enterprises, tax authorities urgently need to change their tax collection and management approach, especially their original methods featuring after-event management and inspection into a new forward-looking approach with service awareness, mutual trust and cooperation with enterprises.
The new approach requires tax authorities to strengthen taxpayers’ compliance capability and willingness, and regulate their tax payment through an analysis of the reasons for non-compliance and provision of quality and efficient tax services. This will greatly reduce compliance costs and improve tax authorities’ work efficiency, achieving maximum results with less effort.
Chapter 2 of the Procedures is just the ‘compliance guidance’, section 3 of which requires tax authorities at all levels to conduct investigation and assessment of internal tax risk control systems within enterprises according to the Guidelines, and take measures according to enterprises’ circumstances to guide them in establishing well-managed internal tax risk control systems. We could then conclude that the Guidelines are actually a step towards implementing the whole of the scheme designed for the new tax collection and management approach targeting large enterprises, linking to enterprises’ tax risk management systems.
For an enterprise whose internal tax risk control system has met the prescribed requirements, the tax authorities may, based on the assessment of the enterprise’s internal control systems and its tax compliance capability, enter into a voluntary tax compliance agreement with the enterprise through negotiations based on equality, openness and mutual trust. Tax compliance agreement is an innovation in China’s tax collection and management system.
Reducing tax inspections
A tax compliance agreement may result in a reduction of inspections by tax authorities and help enterprises to receive advance opinions from tax authorities on any ambiguous matters. Any remaining issues must be resolved before the conclusion of the agreement.
These are all benefits brought by the tax compliance agreement with enterprises. However, it should be noted that the conclusion of a tax compliance agreement between the tax authority and an enterprise must be predicated on the enterprise having in place a well-established internal tax risk control system and sufficient tax law compliance willingness and capability.
The establishment of internal tax risk controls in enterprises will put their relationship with tax authorities on a good footing and make tax collection and management more service-oriented, reducing inspection risks for an enterprise and freeing up tax authorities’ resources for higher risk events, saving tax collection and management costs.
From the future development point of view, the building of internal tax risk control systems today is just a beginning. With the increased improvement of the system, as well as the building of compliance trust between enterprises and tax authorities, enterprises will themselves benefit in terms of promoting their future development.
Wendy Li is vice general manager, Zhongrui Yuehua Tax Advisory Co Ltd, and tax director, RSM China