The People’s Republic of China State Administration of Tax issued the Announcement on Matters Related to Tax Credit Restoration in November 2019, outlining a new policy on restoring tax credit and rectifying prior incompliance. The Announcement took effect on January 1st, 2020. Companies and enterprises in the PRC will be able to apply for tax credit restoration by addressing any inconsistencies in their record and demonstrating their intent to provide accurate documentation.
PRC Tax Credit Ratings and their importance for businesses
The PRC government authorities are in the process of instituting a corporate social credit regime, in which tax credit ratings will play an important part.
The tax credit system has five ratings: A, B, M, C and D. The A rating is for taxpayers with a tax credit score of over 90 points. A score between 70 and 90 points reflects a B rating, while taxpayers that score between 40 and 70 points receive a C rating. Any company that scores less than 40 points receives the lowest rating, D.
New companies in their first year of operation with a tax credit score of over 70 points are eligible for an M rating for their first tax year.
A company’s tax rating weighs heavily on its prospects of gaining facilities from the authorities, such as preferential tax policy eligibility. Tax credit ratings also affect a company’s status among other enterprises and institutions, including their ability to access financing and enter into transactions on a credit basis.
The announcement sets out three conditions for tax credit restoration eligibility, one of which should be met:
Condition 1: The company has submitted tax declaration, payment information and all other relevant information, not having fulfilled these requirements previously, at the time of the deadline.
Condition 2: Companies that have not previously settled their tax bill, including fines, fees and penalties and have therefore been categorized under class-D, and made payment within 60 days of the deadline
Condition 3: The company has met all requirements and been cleared by the tax authorities.
Annex 1 of the Announcement details 19 specific scenarios, including 15 falling under Condition 1, where companies failed to meet time limits for submitting documentation and making payments and faced point deductions, and 4 scenarios under Conditions 2 and 3 where entities failed to pay taxes, fees and fines and were designated under class D by the authorities.
In each case, Annex 1 establishes the procedures and requirements for restoring tax credit.
- Condition 1 scenarios:
If the correction is made in 30 days, the government restores all credit points as long as the tax amount is not more than 1,000 RMB, and 80% of the deducted points if the amount is over 1,000 RMB.
If the correction is made in the same year, the government will restore 40% of the deducted points.
If the correction is made the subsequent year, the government restores 20% of the deducted points.
(Applications must be made before the end of the subsequent year when the government records noncompliance)
- Condition 2 scenario:
If the situation is addressed within 60 days, class D rated taxpayers can apply for re-evaluation of their tax credit rating, but will not be eligible for class-A, as long as they apply before the end of the next year when they are rated class-D.
- Condition 3 scenario:
Once noncompliant classification (class-D) is removed, other entities directly affiliated with the taxpayer can apply to have their class-D rating canceled, as long as the application is made before the end of the next year when they are rated under class-D. Tax status can only be reassigned once per tax year.
Applicants may submit their paperwork to the authorities and declare that all compliance issues have been addressed. Audits will be carried out within 15 business days. Once the process is completed, the applicant will face the tax requirements associated with the new tax credit rating, while previous policies (for periods prior to the rating reclassification) will remain. If the audits show that the declaration of compliance was inaccurate or false, the tax credit restatement will be canceled, and the applicant will lose five points per infraction from their annual taxpayer evaluation.
If you have any enquiries about your tax status in the PRC, please don’t hesitate to contact our China tax services team. Our services equip our clients for any regulatory and legal challenges in China’s diverse, fast-changing landscape. Whether you seek to establish a new PRC enterprise or gain a competitive edge in your existing operations, you can ensure your success by working with us.