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China ’ s Prevention and Solution to the Risk of MSE ’ s Tax Compliance. Mr. Li Linjun Director-General Department of Tax and Information Technology Administration State Administration of Taxation(SAT) People ’ s Republic of China Feb. 2010.

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China s prevention and solution to the risk of mse s tax compliance

China’s Prevention and Solution to the Risk of MSE’s TaxCompliance

Mr. Li Linjun

Director-General

Department of Tax and Information Technology Administration

State Administration of Taxation(SAT)

People’s Republic of China

Feb. 2010


China s prevention and solution to the risk of mse s tax compliance1
China’s prevention and solution to the risk of MSE’s tax compliance

  • 1. Basic concept of China’s MSE

  • 2. Main risks of the tax

    administration on MSEs

  • 3. Main strategies to solve the

    risks of MSEs’ tax compliance


China s prevention and solution to the risk of mse s tax compliance2
China’s prevention and solution to the risk of MSE’s tax compliance

  • 1. Basic concept of China’s MSE

  • According to the “Interim Regulations on Standards of MSEs” issued in 2003,China’s MSE mainly refers to:

  • An industrial enterprise with less than 2000 employees, or an annual sales of less than 300 million Yuan, or a total asset amount of less than 400 million Yuan; an enterprise in construction industry with less than 300 employees, or an annual sales of less than 300 million Yuan, or a total asset amount of less than 400 million Yuan; an enterprise in wholesale or retail industry with less than 500 employees, or an annual sales of less than 150 million Yuan; an enterprise in transportation industry or provides postal services with less than 3000 employees, or an annual sales of less than 300 million Yuan; an enterprise provides accommodation or catering services with less than 800 employees, or an annual sales of less than 150 million Yuan.


China s prevention and solution to the risk of mse s tax compliance3
China’s prevention and solution to the risk of MSE’s tax compliance

  • From the perspective of taxation, presently in China about 16 million eligible MSEs, including around 11 million self-employed, are under tax administration, accounting for about 70% of all registered enterprise taxpayers, the number of which is over 23 million as by the end of 2009.


China s prevention and solution to the risk of mse s tax compliance4
China’s prevention and solution to the risk of MSE’s tax compliance

  • 2. Main risks of the tax administration

    on MSEs

  • Insufficient information about their income, information asymmetry, and low compliance

  • Limited tax administrative resource, comparing to the large number of MSEs

  • Lack of legal system requiring third-party information be provided to revenue authority in a systematic, comprehensive and clear manner; lack of strict laws or regulations on controlling cash transactions, and a matching personal credit rating system is not in place


China s prevention and solution to the risk of mse s tax compliance5
China’s prevention and solution to the risk of MSE’s tax compliance

  • 3. Main strategies to solve the risks of MSE’s compliance

  • MSE’s high risk nature

  • SAT’s Goal:

    voluntary compliance of MSEs

  • Methods:

    optimized taxpayer services strengthened administration


China s prevention and solution to the risk of mse s tax compliance6
China’s prevention and solution to the risk of MSE’s tax compliance

  • (1)Optimize the tax services for MSEs

  • Preferential tax polices

  • Supporting MSEs is a national policy

  • Article 17 of “MSEs Promotion Law”

    Encourages venture funds to invest in MSEs through preferential tax policies

  • Article 23in “MSEs Promotion Law”

    Encourages the establishment and development of MSEs through preferential tax policies


China s prevention and solution to the risk of mse s tax compliance7
China’s prevention and solution to the risk of MSE’s tax compliance

  • Other tax incentives


China s prevention and solution to the risk of mse s tax compliance8
China’s prevention and solution to the risk of MSE’s tax compliance

  • Better communication with MSE taxpayers and enhanced services

  • Visits, symposiums and so on

  • Seeking opinions

    providing guidance and help


China s prevention and solution to the risk of mse s tax compliance9
China’s prevention and solution to the risk of MSE’s tax compliance

  • (C) Reduce MSEs’ compliance cost

  • Tax awareness campaign

  • Waive tax registration fee in some population

  • Simplified procedure

  • Free consultative service through a national unified tax service hotline (12366).


China s prevention and solution to the risk of mse s tax compliance10
China’s prevention and solution to the risk of MSE’s tax compliance

  • (D) Diversified payment methods

  • Payment through telephone, mail, internet and bank

  • simplified or unified tax collection period

  • Automated payment transfer from taxpayer’s bank account


China s prevention and solution to the risk of mse s tax compliance11
China’s prevention and solution to the risk of MSE’s tax compliance

  • (2) strengthen risk management on tax compliance of MSEs

  • Categorized administration and collection method

  • (a) Collection-on-self-filing and collection-on-verificationon MSEs.


China s prevention and solution to the risk of mse s tax compliance12
China’s prevention and solution to the risk of MSE’s tax compliance

  • (b) tax payable generated by computers

  • (c) commissioned collection on self-employed


China s prevention and solution to the risk of mse s tax compliance13
China’s prevention and solution to the risk of MSE’s tax compliance

  • (B) Enhance the gathering and sharing of tax-relevant information

  • Key information:

    tax registration, declaration, invoice issuing, financial accounting, consumption of energy resources (e.g. coal gas, fuel oil, water, and electricity), consumption of raw materials, bank account opening and banking transactions.


China s prevention and solution to the risk of mse s tax compliance14
China’s prevention and solution to the risk of MSE’s tax compliance

  • Third party information

  • Legislation

  • IT application


China s prevention and solution to the risk of mse s tax compliance15
China’s prevention and solution to the risk of MSE’s tax compliance

  • (C) Conduct tax assessment on MSEs

  • China’s tax assessment is similar to the tax auditing which is being widely practiced in OECD countries.

  • What is tax assessment?


China s prevention and solution to the risk of mse s tax compliance16
China’s prevention and solution to the risk of MSE’s tax compliance

  • The usual method:

  • Factor identification

  • Sequencing and rating of risk factors

  • Handle the high-risk taxpayers

  • Investigation and punishment


China s prevention and solution to the risk of mse s tax compliance17
China’s prevention and solution to the risk of MSE’s tax compliance

  • General coverage: less than 10% of all enterprises annually.

  • A case-study


Result of Estimation

Result of Estimation

Result of Estimation

Result of Estimation

Risk Indicator A: VAT Burden Rate 31% lower than industrial pre-

warning rate; Profit-margin Rate 36% lower than industrial average.

Degree of Indicator D 20 points

Degree in Total 78 points

Degree of Indicator

B 30 points

Degree of Indicator

A 15 points

Degree of Indicator C

13 points

Risk Indicator B: Quarterly Freight Expenditure as

Deduction, 57% of Sales in corresponding period;

VAT Burden Rate 28% lower than Historical Level.

Risk indicator C: Percentage of

Expenditure 33% higher than industrial average.

Key Risks

Risk Level

Risk Indicator D: Issued-on-Behalf Invoices of Expenditure on Office Supplies, 0.47 million Yuan.

A casestudy on Risk Management of Company A

Analysis & Identification of Risk

Processing of Risk Administration

Outcome of Risk-administration

Degree Sequence of Risk

Estimation of Risk Degree

  • Through the tax-administrator’s portfolio of measures such as issuing risk-reminder letters to the taxpayer, investigating in the invoices on main expenditure, conducting professional assessment and so forth, Company A made a supplementary payment of 1.76 million Yuan as the tax payable, plus 32 thousand Yuan as the fine for overdue tax payment. Its VAT burden rate raised from 2.31% to 3.47%, which is 0.1% higher than the industrial average, and the profit-margin rate raised from 5.84% to 9.8%, which is 0.7% higher than the industrial average.

Result of Estimation

Risk Level Four

Abnormal Burden Rate

Abnormal Profit-margin Rate

Abnormal Expense Rate

Abnormal Invoices Accepted

1


Conclusion

Thank you for your attention!


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