In daily conversations, people tend to use the phrases "tax underreporting" and "tax evasion" interchangeably in China. In fact, however, there are distinctions between the two terms.

The most prominent distinction lies in the taxpayer's motive. Generally, in a tax-evasion case, the taxpayer has a "strong and explicit" motive to avoid paying taxes, whereas, in a tax underreporting case, such a "strong and explicit" motive is not in place.

"Tax underreporting" and "tax evasion" concepts are widely acknowledged by the tax authorities, though they have never been formally introduced as terms in tax legislation.

Usually, a taxpayer who evades taxes would be subject to a more severe penalty than one who just underreports taxes.

Currently, when tax authorities identify the tax non-compliance of a taxpayer in a tax audit, the taxpayer usually has only very few communication channels through which to explain the reasons for his non-compliance and thus is very likely to be deemed to have a "strong and explicit" motive to evade taxes.

The business community believes that many taxpayers failed to comply with tax laws not because they meant to evade taxes, but only because their understanding of the tax laws is different from the tax authorities'. As such, the business community thinks it unfair to have no effective venues for taxpayers to explain the non-compliance issues.

In an effort to improve this above situation, Beijing municipal government introduced a series of new measures in tax administration in February 2003. These new measures include two new tax circulars issued by the Beijing Municipal Local Tax Bureau and a bulletin issued by the Beijing Municipal Government (the Government), marking three orchestrated steps toward one aim - the creation of a more fair and friendly administrative environment for taxpayers.

It is expected that China will roll out the new measures throughout the country if the current pilot test in Beijing yields satisfactory results.

As the first step, the Beijing tax bureau issued "Implementation Measures Regarding Creditability Ratings of Taxpayers (Tentative)" (the CRT Measures) in February 2002, which provides guidance to tax authorities for giving ratings to all registered taxpayers in Beijing with tax-paying histories of two or more years.

In the future, the bureau and its branches will direct different levels of administrative attention to taxpayers of different ratings.

According to the CRT Measures, taxpayers will be classified into three categories in respect of tax-compliance creditability: A - good; B - normal; C - unsatisfactory.

As the second step, on February 20, 2003, the bureau further issued "Implementation Measures Regarding the Adoption of Access Rules for Tax Audits" (the ARTA Measures), which has been in effect since March 1, 2003. Under the ARTA measures, tax assessments should take the form of written notice and/or scheduled interviews; and no audits are allowed without tax assessments beforehand.

As the third step, the Beijing municipal government bulletin on 7 April 2003 depicts the CRT and ARTA measures as an important movement for improving the investment environment for foreign investors.

The bulletin, signifying Beijing's strong initiative for attracting more foreign investors, summarizes the CRT and ARTA measures into three action points:

1. establishing the CRT system and publicizing the list of taxpayers with an A rating;

2. establishing an interviewing system between the tax authorities and taxpayers aimed at helping taxpayers to better understand and comply with tax laws before deciding on the necessity for tax-field audits;

3. establishing the ARTA system to regulate the audit power of tax officers.

Next week, we will analyze the tax authorities' reasons for the above measures and their impacts onto taxpayers.

* Petrina Tam is a partner of the China tax practice of PricewaterhouseCoopers in Hong Kong. Cathy Jiang is a manager of the China tax practice of PricewaterhouseCoopers in Hong Kong.

Close

Today's Top News		Top Business News
+The next great leap after Shenzhou V ( 2003-10-21) +Hu calls for balanced development ( 2003-10-21) +Report: SARS not airborne virus ( 2003-10-21) +Japan urged to resolve weapons issue ( 2003-10-21) +Int'l AIDS group opens Beijing office ( 2003-10-21)		+Home-appliance giants want wheels ( 2003-10-21) +Exchange-rate reform under study ( 2003-10-21) +Health insurance sector called for ( 2003-10-21) +SanDisk teams up to open outlets ( 2003-10-21) +Housing prices start to sag in Shanghai ( 2003-10-21)