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FINANCE: SAT and SAFE refine the interim and post administration mechanism by establishing information sharing system
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SAT and SAFE refine the interim and post administration mechanism by establishing information sharing system

By Kelvin Lee, PwC Tianjin


BT 201701 FINANCE 01In brief


The Memorandum on promoting the information sharing mechanism and implementation of joint supervision ("the Memorandum") was signed by the State Administration of Taxation (SAT) and State Administration of Foreign Exchange (SAFE) on 14th November, 2016, in Beijing. According to the Memorandum, SAT and SAFE will monitor and assess the export tax refund, cross-border tax source and forex collection and remittance in order to achieve the purpose of information exchange, cross supervision and outcome sharing between the two sides. Via the information sharing platform of tax collection and forex administration, tax bureaus will have a better understanding of the enterprises' cross-border business and its relevant tax issues which in turn would facilitate enhancing their supervision.


Detailed information regarding method of information sharing, frequency of information exchange and how the two platforms of SAT and SAFE interface with each other under the principle of the Memorandum needs to be further clarified. Meanwhile, it is anticipated that the process of tax matters relating to forex would be simplified.


We will briefly introduce how the information sharing mechanisms of SAT and SAFE would push for a more strict supervision, analyse the impact of information sharing on tax payers, look forward to the relevant implementation rules and share our observations and views.


BT 201701 FINANCE 02In detail
Background


With the accelerating process of economic globalisation and substantial growth on quantity and size of enterprises' forex related tax matters in China, the cross-border tax issue has become a hot topic of the Chinese tax authority and the international community.


To strengthen information sharing between two sides and to improve the interim and post administration mechanism as well as to implement the joint incentive and punishment on taxpayers, SAT and SAFE concluded the Memorandum on promoting the information sharing mechanism and implementation of joint supervision on 14th November 2016 in Beijing.


According to the limited information disclosed on public channel, SAT and SAFE will focus on monitoring and assessing those aspects in respect of export tax refund, cross-border tax source and forex collection and remittance to achieve the purpose of information exchange, cross supervision and outcome sharing between two sides.


Information sharing supports supervision


Before concluding the Memorandum, information of taxation and forex had been broadly exchanged to ensure the national tax collection work to be carried out in an orderly manner. On one hand, the forex information is the pre-condition to do the relevant tax treatment. For example, export tax refund mechanism requires information sharing of forex collection and export tax refund; while before the forex system of trade in goods was reformed, obtaining forex verification sheet from SAFE was necessary to apply for export tax refund.


On the other hand, SAFE (or banks) may not proceed to cross-border business until enterprises clear the tax payable with the in-charge tax bureaus. For example, pursuant to SAT and SAFE Public Notice [2013] No.40 which stipulates that domestic institutions and individuals who remit forex payments more than equivalent of USD 50,000 must perform record-filing to the in-charge local state tax bureaus for endorsement and obtain the Record Filing Form for Cross-Border Remittance Regarding Services and Trading.

BT 201701 FINANCE 03
Although SAT and SAFE have established some platforms for information exchange, they have not built up a systemic information sharing mechanism due to some reasons. However, the conclusion of the Memorandum filled this gap and prompted the two sides to exchange information in a systematic and normalised manner.


Via the information exchange platform between two sides, SAT and SAFE are able to share tax collection and forex information, to an extent, enriching the tax and forex data of each side. In this regard, the tax bureaus should be able to understand the enterprises' cross-border transaction, identify the relevant tax issues and enhance their supervision on certain matters.


From a long-term perspective, the Memorandums will have a positive effect on big data collection and analysis on economic activities. As a result, SAT and SAFE are able to understand the innovative changes of the enterprise and to summarise the frequent tax or forex issues rising through utilising the shared information which may facilitate formulation of policies in future.


The takeaway


BT 201701 FINANCE 04The conclusion of the Memorandum will significantly enhance information transparency of taxpayers. With the increasingly extensive information of cross-border business obtained by the tax authority, the tax authority will strengthen the supervision on tax related matters. In this regard, the enterprises will be subject to more strict supervision and also face more challenges to be in compliance from tax perspective.


We have witnessed that the in-charge tax authority collected data of cross-border payments from SAFE reporting system, and more specifically, it included the exact the payment date, payment amount, recipient and even the transaction notes. Based on such information, the tax authority was able to raise their inquiries and investigate each payment in respect of whether the taxes have been paid appropriately.


In addition, tax bureaus were able to monitor the area where they lacked such capability before. For instance, it may be possible in future for tax bureaus to identify and handle the tax issues in an efficient manner with respect of round-trip investments through special purpose vehicles by collecting forex registration information.


Pursuant to the principle of Memorandum, the detailed implementation rules regarding the method of information sharing, frequency of information exchange and how the two platforms of SAT and SAFE interface with each other remains to be further clarified. Meanwhile, in context of open and direct way of information sharing, whether the process of tax matters relating to forex (e.g. record-filing for cross-border payments) could be simplified or not is yet to be decided.


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