what we think

Tax Official Empowered to Tackle Export VAT Refund Fraud

20 February 2011

With new and potentially onerous requirements for exporters, the Chinese State Administration of Taxation issued Bulletin No.11 Administrative Measures for the Verifications of Taxation on Export Goods by Sending Letter Confirmations (“Bulletin No.11”) on August 30, 2010.

Designed to combat and prevent export tax refund fraud, Bulletin No.11 adjusts the procedures for export tax refund investigations and requires exporters to conduct self-inspections – a procedure of reporting the nature, contents, and details of their export activity – in eight circumstances. Taxpayers with export businesses should review Bulletin 11 carefully to consider the risks of inspections, and institute their own procedures to maintain records of compliance.

1. Self-Inspection

Bulletin No.11 places a new requirement on exporters to complete a self-inspection form if any of eight circumstances are satisfied, including where the business is suspected of engaging in fraudulent activity, the business is on the tax authorities’ watch list (not publicly available), the reported export unit price is 10% higher than what was indicated in the last reporting, and specific circumstances involving exports to Hong Kong, Macau, Taiwan, and neighboring countries. The Tax Bureau will review the self-inspection form and, if there are no obvious issues, will approve the refund. However, if there are suspicions that cannot be resolved, the Tax Bureau will issue an Investigation Letter to the exporter, with the export refund suspended until a satisfactory response is received.

Exporters should take note that the self-inspection form requires exporters to disclose confidential information about their exporting businesses, including information about its relationship with the foreign buyer, agents the business is using, and information on the execution of the domestic purchasing contract. A manufacturer is additionally required to state if it has issued any false VAT invoices or claimed a VAT input credit based on false VAT invoices during the past 12 months. Furthermore, Bulletin No.11 retains the requirement that the competent tax authority may conduct an onsite inspection of the exporters. These steps could heavily burden exporters on compliance. Exporters should be particularly careful when they face a request for self-inspection.

2. Exemption from Self-Inspection and Investigation Letters

Exporters can exempt themselves from self-inspection and an investigation letter in six circumstances, and as long as the Tax Bureau does not find any seriously doubtful issues. Important are the exceptions for exporters that do not claim more than RMB 100,000 of refund per month, and exporters that apply for refunds with invoices issued directly by the Tax Bureau. Staying within the available exemptions will avoid the burden imposed by a self-inspection and letter-investigation.

3. The Tax Administration's Investigative Power is Expanded

In addition to the reporting and investigation procedure outlined above, the tax administration also has enhanced its investigative powers. Upon receiving both the investigation letter and the reply, and according to different circumstances, the competent tax authority is entitled to decide to cancel, suspend, or command the return of the paid-up tax refund, and suspend the release of the tax refund until the doubtful points are removed. Additionally, the regulations maintain a previous requirement of sending at least two officials to perform an onsite inspection of the supplier/exporter.

We suggest that taxpayers take the following steps to mitigate any potential tax risks.

  • Conduct internal inspections on exporting and relevant businesses as soon as possible. Pay special attention to patterns of exports that may trigger any of the 8 circumstances requiring self-inspection and to any products on the watch list.
  • As the trade authority’s watch-list and early warning information are generally unavailable to the public, exporters may not be able predict whether they have
    been targeted for self-inspection. Exporters are therefore advised to prepare full sets of exporting documents in advance; and ensure consistency between the actual sales of goods and the goods listed on VAT invoices;
  • If required to perform a self-inspection, companies should complete the form(s) carefully and accurately. Removing inconsistencies and omissions will reduce suspicions and prevent obvious issues requiring the authority to conduct further investigations.