The deputy director of China’s State Administration of Taxation (SAT) announced that tax authorities across China will rely more on big data analytics to detect tax evasion by large businesses and individuals. The Chinese government will use this data to target tax evasion, ensure taxpayer compliance, and ultimately achieve its goal of common prosperity.
China’s tax big data is a vast collection of taxpayer information, historical operational and market transaction data, and data generated in the process of tax law enforcement. The tax data comes from various tax declaration and management systems of tax authorities and their authorized agencies, such as the Golden Tax System (GTS) Phase III. China recently launched GTS Phase IV, which collects more tax data from even more sources.
The role of China’s tax big data is to enable tax authorities to carry out precise tax supervision on various types of tax evasion. This marks a significant advantage and breakthrough in managing tax through big data compared with traditional invoices. The constantly updated tax big data’s strong analytical capability makes it possible for tax authorities to automatically identify abnormal data and become aware of tax risks. Tax authorities can compare and validate the authenticity of historical tax data submitted through bank accounts, account data of upstream and downstream companies, revenues, costs, and profits in the same industry.
China’s tax big data also allows for retrospective analysis to provide tax authorities with important clues from abnormal data for targeted inspections. The data can collect evidence based on accurate and traceable data at the same time. The application of China’s tax big data is bound to increase the tax transparency of multinationals operating in China. Tax authorities will be aware of every single ticket issued or received and whether or not every invoice has been entered into a taxpayer’s account. As a result, tax evasion will be easier to detect going forward.
The SAT will focus on China-based companies from seven high-risk fields and three types of tax evasions. Multinational companies should expect strong and continuous supervision. The seven targeted fields include the production and processing of agricultural and sideline products; the acquisition and utilization of waste materials; the purchase and sale of bulk commodities, such as coal, steel, electrolytic copper, and gold; for-profit educational institutions; medical cosmetology; live-streaming platforms; and intermediaries.
The three types of tax evasion under the spotlight include shell companies, fake exports, and false declarations of income. They are frequently presented as enterprises issuing false VAT invoices, concealing income, listing costs falsely, obtaining tax benefits by cheating, and conducting aggressive tax planning using related-party transactions.
Tax big data successfully assisted tax authorities last year in investigating and exposing a slew of tax cases in the above-mentioned fields, demonstrating China’s attitude of zero-tolerance for tax evasion. The application of tax big data is bound to increase the tax transparency of multinationals operating in China, as tax authorities will be aware of every single ticket issued or received and whether or not every invoice has been entered into a taxpayer’s account.
To survive the challenges from tax big data, multinationals with China operations should take measures to cope with this new era of inspection. Conducting self-examination to promptly discover and correct potential historical and ongoing tax violations, especially in relation to shell companies, fake exports, and false declarations of income, is necessary. Multinationals would also be wise to strengthen communications with competent tax authorities to better address existing tax issues. Furthermore, they should get a better balance between tax compliance and tax planning, revisit and control various tax risks, and make a long-term plan.
In conclusion, China’s use of tax big data represents a significant shift in tax administration that will impact multinationals with operations in China.