Tax evasion occurs where individuals and businesses search for ways to avoid paying large amounts of tax to the government. The gravity of the laws for punishing convicted tax evaders varies per country but is treated as a serious crime in every country. In China, anyone caught evading taxes will generally be subject to criminal charges, with considerable fines being imposed as well as the possibility of imprisonment.
Find out all you need to know about tax evasion in China, including the applicable regulations, consequences, and why tax compliance is so important in the country.
What is Tax Evasion?
Tax evasion pertains to actions of avoiding the payment of tax liabilities, in an illegal manner. Tax evasion schemes often involve corporations or individuals deliberately misrepresenting their income in different ways, such as through underreporting revenue, inflating deductions, or keeping assets in offshore accounts.
In China, tax authorities will collect penalties on underpaid or unpaid taxes at a rate of 0.05% per day. Additionally, a fine that is not less than 50% but not more than five times the amount of unpaid taxes may be imposed. Moreover, for tax evasion cases that constitute a crime, criminal liabilities will be tried according to law.
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Regulations on China Tax Evasion
According to the relevant provisions of the Supreme People’s Procuratorate and the Ministry of Public Security, taxpayers can be prosecuted for engaging in any of the following activities:
- Taxpayers using methods to conceal or falsify tax declarations or failing to declare the correct income in order to avoid paying taxes can be charged with tax evasion.
- Taxpayers who have been given criminal penalties for tax evasion or have been awarded administrative penalties more than two times within the last five years.
- Taxpayers who have evaded tax payments amounting to more than RMB 50,000 or more than 10% of the total tax payable.
- The tax withholding agent underpaid or failed to pay taxes amounting to more than RMB 50,000.
Under the current Criminal Law in China, the avoided tax amount that is considered relatively high is defined as either:
- Being over 10% but not more than 30% of the tax payable;
- Amounting to over RMB 10,000 but less than RMB 100,000; or
- Committing tax evasion and given administrative sanctions more than once.
Satisfying any of these criteria can result in taxpayers being suspected of engaging in tax-evading actions.
Consequences of Tax Evasion in China
The following are consequences of any actions construed to be tax evasion in China:
Fines Imposed
Tax authorities will collect penalties unpaid taxes or underpaid taxes at a rate of 0.05% per day. Additionally, a fine that is no less than 50% but no more than five times the amount of unpaid taxes, will be imposed.
Fine and Imprisonment
If an individual failed to account for more than 10% of their tax payable and they are found guilty of tax evasion, they shall be fined and may face imprisonment for a period of no more than three (3) years. Those who failed to account for more than 30% of their tax payable shall be fined and imprisoned for a period of three (3) to seven (7) years.
Cumulative Action
If the act of evading taxes has been carried out multiple occasions but has not been dealt with, calculations will be based on the cumulative amount.
Penality Imposed with No Criminal Action
If the tax authority has issued a recovery notice and imposed an administrative penalty, no criminal responsibility will be pursued so long as the entity in question has paid the relevant fees and taxes payable. Still, the tax bureau can enforce the penalty of increasing the fine up to five (5) times its maximum amount for huge tax evasion cases.
Time Limit and Overdue Payment
There are clear provisions on the time limit for enforcing retroactive tax returns. For underpaid taxes that the tax authority failed to collect on time, overdue payment may be required within the three (3) years, without a late fee or fine.
However, if the taxpayer intentionally avoids paying taxes and the authorities fail to follow up on their collection, the tax authority may recover the tax payable plus overdue fine within three (3) to five (5) years. For intentional tax evaders, collection of tax payable can be pursued indefinitely.
Blacklist System
China’s State Administration of Taxation has amended its measures to combat tax illegalities through a blacklist system. Under the system, the personal information of serious tax evaders including their name, social credit code or taxpayer-identification number, and registered address will be entered into the system.
Details on the violation and associated cases will be disclosed through the provincial level taxation authorities and may be published online or in other relevant channels like newspapers, TV, and radio.
While China has a strict policy on tax offenders, they also factor in behavioral aspects when enforcing the law. Some tax evaders can be exempted from punishment through the ‘first breach without penalty’ system so long as their non-compliance:
- has occurred for the first time;
- can be corrected on time; and
- did not lead to any threat or harm to the state.
Why Tax Compliance is Important in China
Value-added tax is the most important tax in terms of revenue for the Chinese government. The government has made extended efforts to accelerate the digitalization of tax administration, especially with the disruption of the COVID-19 pandemic. In relation to this, China has adopted e-invoicing to make it easier for companies to integrate the technology into their internal enterprise resource planning (ERP) systems. With this, there is no valid reason for enterprises to not to comply with the tax regulations enforced by the government.
Avoiding Tax Evasion in China
China has recently announced that it will be conducting more inspections in an effort to uncover more cases of tax evasion. The government vowed to be more resolute on the crackdown on illegal income, especially income derived from insider trading, financial fraud, tax evasion, and stock market manipulation.
Just recently, a live-streaming influencer known as Viya was ordered to pay a fine amounting to RMB 1.34 billion (USD 210 million) for tax evasion, illustrating the severity of which the government is pursuing tax evasion. According to reports, she avoided taxes amounting to RMB 643 million by falsifying tax declarations and concealing income details from 2019 to 2020. The local tax bureau also said that the influencer failed to rectify the situation even after repeated reminders for tax evasion.
The continuous action against celebrities, influencers, and similar professionals coincides with President Xi Jinping’s “common prosperity” initiative, which is aimed at reducing economic inequality. According to his plan, one of the methods to achieve economic equality is by curbing the excessive income of those working in the entertainment and technology sectors.
As of the State Taxation Administration’s 2021 report, the government had uncovered and punished more than 440,000 companies for tax fraud. The recent news on the tax evasion case of Viya has appeared to alert other influencers and entities working in similar industries as thousands proceeded to ensure their tax declarations are correct and up to date.
Common Cases Probed for Tax Evasion in China
Errors in Tax Filing
Taxpayers in China often underpay their tax obligations as a result of either being unfamiliar with the taxation laws or due to carelessness in the filing of tax returns. Although these cases do not necessarily harbor malicious intent, if tax evasion is uncovered an individual or entity may be liable to face the consequences.
Repeated Underpayments
Repeated underpayment may attract the attention of the tax bureau, increasing the possibility of tax inspection. Depending on how the authorities see the case, significant fines may be imposed. As such, it is best to pay attention to filing correct tax declarations. Getting the services of a financial advisory firm in China that is familiar with the entire process of filing taxes and other related activities will be largely beneficial for any enterprise.
Incorrect Policies Followed
Enterprises may also get involved in tax evasion behavior for other reasons, such as following the incorrect tax policies, following the same processes as the partner firms abroad or for other historical reasons. In this case, failure to correct wrong behavior and pay the due differences in tax payables may constitute the crime of tax evasion.
Tax Evasion in a Subsidiary
Large, foreign-invested corporations that manage Chinese subsidiaries often have board members that may not be aware of the actions of their subordinates. In case the executives of the Chinese subsidiaries are found to be guilty of tax evasion, there is only a small chance that the foreign board members will also be held liable for tax evasion.
Final Thoughts
Tax evasion is considered a serious offence and companies as well as individuals need to ensure that they remain compliant with local tax regulations in China. Whether deliberately avoiding payment of taxes and correct filings, or through an error in tax filings, companies and individuals may still be held liable if an occurrence of tax evasion has been uncovered.
MSA – Tax Department
Our team consists of tax experts who are able to ensure that your company remains compliant in its tax administration. By partnering with us, you reduce the risk of error and ensure your company’s taxes are correctly managed, allowing you to focus on other more important business tasks. Get in touch with us today for all your accounting, tax advisory and company setup needs
