Secret weapon of Chinese tax collectors in the fight against tax evasion: Phase IV of the Golden Tax system
A key function is the control of invoice creation, the so-called Subscribe – a legal receipt that serves as proof of purchase for goods and services.
Phase IV of the Golden Tax system aims to build an information sharing system between financial institutions, taxpayers and tax authorities. The integrated system will help tax authorities collect and analyze tax-related data from more areas to improve tax supervision.
Phase IV will focus on the complete digitization of invoices. The invoice process is a crucial part of China’s tax system.
By the end of 2023, all provinces in the country will have digitized Subscribe Pilot programmes. The exact date of introduction of national electronic invoicing for the submission and exchange of digitalised Subscribe still needs to be confirmed.
Although the nationwide rollout of Phase IV is not yet fully complete, some features are already ready for use.
Why is Phase IV of the Golden Tax important for China?
Tax evasion remains a problem in China despite efforts by Chinese regulators to improve the efficiency of tax collection and streamline the process. In its annual report released on June 25, China’s National Audit Office found that loopholes and omissions at customs and various tax authorities had led to tax losses of 50.8 billion yuan ($7.1 billion).
In recent years, high-profile tax scandals have emerged involving Chinese celebrities, and more recently, listed companies have been ordered to pay decades-old overdue taxes. All of these cases have underscored public concern about local governments’ debt problems and weak business confidence.
In addition, China plans to implement consumption tax reform to increase local government revenues. The fourth phase of the Golden Tax would support such efforts.
Phase IV of the Golden Tax would make it easier for regulators to detect tax irregularities among companies using fake bank accounts and false invoices. The system could also enable better assessment of shell companies, flag abnormal tax returns and help determine whether companies’ inventory levels match their actual inventory levels.
This system could also identify companies that have a significant mismatch between income and expenditure, as well as those that do not pay their income tax and social security contributions on time.
We believe that companies do not have to worry too much
What specific concerns do companies have about Phase IV of the system?
The data-sharing system has raised concerns about data privacy, with companies and their owners fearing that their bank accounts, assets and investments abroad will also be monitored by Chinese authorities.
The integration of Golden Tax Phase IV requires the collection, storage and processing of a large amount of company data, making data protection a critical issue.
Tax consultants said that while companies have little control over data exchange between government agencies, a number of safeguards, such as data encryption and access controls, were implemented when designing and implementing Phase IV of the Golden Tax to ensure the security and integrity of tax data.
“Tax authorities may need to provide a certificate of investigation from the People’s Court to access a company’s bank account information. In this context, we believe companies do not have to worry too much,” said Alberto Vettoretti, managing partner at Dezan Shira & Associates.
What are companies doing to meet the new requirements?
Companies operating in China need to increase their investment in technology through digital transformations and upgrades. Analysts expect that companies will need to purchase related services from technology providers to support invoice digitization and related cloud services.
Vettoretti advises companies to clearly define the purpose and scope of data use, implement solid data protection mechanisms, protect taxpayer privacy and business secrets, and prevent data misuse and leaks.
Under the fourth phase of the Golden Tax, the tax arrangements of high net worth individuals and multinational companies may come under stricter scrutiny. Foreign investors need to be aware of these changes and ensure that their tax arrangements comply with legal requirements, he said.
“Companies should instead focus on the authenticity, accuracy and completeness of their financial and tax data, as well as the compliance of their financial and tax agreements,” he said.
