Recently, State Administration of Tax issued Annual Corporate Income Tax (“CIT”) Return Package of People’s Republic of China (Type A, 2014). The new return package will come into force on Jan 1st, 2015 and first to be adopted by resident CIT taxpayers in the 2014 annual CIT filing. This issue of China Tax Alert summarizes the main content of and changes in the new return package and would like to remind taxpayers of certain points for attention.
With the deeper implementation of the new CIT law, the current return package can no longer meet tax authorities’ needs in tax administration and restricts the improvement of their service level. In addition, after the launch of Measures Meet People’s Convenience in Tax Affairs by State Administration of Tax, tax authorities face the double pressures from tax administration and tax collection and as a result, put forward higher demands for the functionality of return package. Thus, the new annual CIT return package has emerged as the times demand.
Main changes in and content of the new return package
In the new return package, form structure is streamlined and organized around the Principal Form. Each supplementary form, while independently reflecting specific tax policy or tax preference, also correlates with the principal one. After filling in the supplementary forms either electronically or manually, most data will generate automatically in the Principal Form. Besides, the new return package contains large quantities of information like accounting data, differences between tax law and accounting principle, tax preferences, overseas income etc., making it easier for tax authorities to understand how taxpayers are fulfilling their tax obligation and do analysis of risk of tax evasion.
Structure of return package:
The new return package comprises one Form of Basic Information, one Principal Form and 39 supplementary forms, totaling 41 forms. Despite an increase of 25 forms compared with the current 16-forms return package, based on their business situation, taxpayers may choose only to fill forms that are related with their business and neglect those irrelevant ones.
The new return package includes:
- Form of basic information: In this form, an enterprise shall enter its name, registered office, industry, registered capital, number of employees, shareholding structure, accounting policy, computation methods for cost of stock, overseas investment etc.. These information can not only serve as a substitute of an enterprise’s registration information (For example, in light of an enterprise’s assets and assets change information and number of employees, it can be judged whether the taxpayer qualifies as a small-profit enterprise. And for a small-profit enterprise, there is no need of it to submit any other data after enjoying preferential tax treatment), but are also necessary for tax authorities in tax administration.
- Principal form: The structure of this form varies little from that of the one in the current return package and reflects the taxation process of CIT. That is, on the basis of accounting profit, make tax adjustment pursuant to tax law, compute the amount of taxable income, deduct the amount of tax preferences, make good tax paid abroad and at last, calculate the amount of tax payable (refundable).
- Supplementary form: The new return package contains six forms of income and expense breakdown, 15 forms of tax adjustment, one form of loss for compensation, 11 forms of tax preferences, four forms of tax paid abroad for making good and two forms of tax payment on consolidated basis, totaling 39 forms.
– Form of income and expense breakdown: The six forms reflect the costs and expenses incurred by an enterprise pursuant to accounting policy and constitute a major source of data for an enterprise in tax adjustment. In particular, an enterprise is required to disclose more detailed expense breakdown with respect to period costs incurred by it and “Outbound payment” has been added as a new item. Disclosing these information means greater challenge for an enterprise but opportunities for tax authorities to understand tax adjustment issues and an enterprise’s obligation in acting as withholding agent with respect to outbound payment.
– Form of tax adjustment: The 15 forms divide all items need tax adjustment in light of differences between tax law and accounting principle into three major categories of income, cost and assets and reflect the computation process of data. They replace the one Form of Tax Adjustment in the current return package and the information contained in them will make it more advantageous for tax authorities to do statistics calculation and analysis. Compared with the current form, these new forms list the particulars of each adjustment item in more minute ways. For example, items like “accrued expense” and “estimated debt” can be filled only in the column of “Others” in the current return package and an enterprise has to provide an independent explanation for the situation. However, in the new return package, these items can be filled in the newly-added column of “Deductible items go beyond periods”, making the situation more explicit. Besides, an enterprise is required to provide more detailed information when filling in the newly-added Form of tax adjustment breakdown with respect to financial allocation with special purpose and Form of pre-tax deduction and tax adjustment breakdown of assets loss. Via these forms, tax authorities shall be able to judge whether the incomes, expenses, costs etc. declared by an enterprise comply with the regulations of tax law.
Concerning the new return package, we would also like to remind enterprises of changes in declaring special tax adjustment items related with transfer pricing between related parties. In the old Explanatory Notes, it is stipulated that taxable income during special tax adjustment can only be turned up, not down. And in the column “turn up taxable income”, taxpayers are required to fill its voluntarily turned-up taxable income of the year in accordance with regulations. But in A10500: Form of tax adjustment items breakdown in the new return package, there is distinct instruction that the amount can also be turned down and it shall be the reduced taxable income declared by the taxpayer pursuant to advance bilateral pricing arrangement or notice of the result of transfer pricing negotiations.
– Form of loss for compensation: This form calculate the period of years for the loss to be carried forward for making good and the offset limit. Compared with current return package, there is no substantial change except the addition of the column of ‘Deductible loss transferred in/out through combination or division”.
– Form of tax preference: The current 39 items enjoying tax preference of CIT are categorized on the ground of tax base, taxable income, tax break etc. and are contained in 11 forms. The 11 forms replace the current one Form of items enjoying tax preference and reflect tax preference enjoyment situation and computation process in more distinct way.
– Form of tax paid abroad for compensation: The form reflects tax paid abroad by an enterprise for overseas income, how to make it good and specific method for computing the compensation amount.
– Form of consolidated payment of tax: The form reflects how an enterprise practicing tax payment on a consolidated basis distribute tax burden among its branch organizations.
Grant Thornton observation
The new return package has fully taken into consideration of the scale and business situation of different taxpayers to facilitate them in tax filing. Meantime, it requires an enterprise to disclose much more financial information, allowing the tax authorities the opportunity to collect large amounts of data to conduct CIT risk management, follow-up administration and analysis of tax income. In addition, the item “Turn down taxable income” has been added in the new return package with respect to “special tax adjustment”. Thou this item only apply to taxpayers with advance bilateral pricing arrangement or negotiation of transfer pricing adjustment, it constitutes a precedent. With the gradual improvement of taxation system of China in respect of related party transaction, taxpayers might possess greater degrees of liberty to do adjustment by themselves in the near future and truly realize voluntary upward- or downward- adjustment of taxable income in compliance with arm’s length principle.
In light of the above, we’d like to ask taxpayers to pay attention to work in the following areas in the new CIT declaration and collection circumstance:
- Grasp the structure, content and requirements of the new return package as soon as possible and combine those with the actual situation of the enterprise. Get familiar with the filling method of each form, logic between different forms and points for attention in filling.
- Gather the accounting data of 2014 and sort out the data necessary for the final settlement of CIT of 2014. Meanwhile, establish the Chart of Accounts of 2015 to provide a data basis for future CIT final settlement and reduce workload in collecting CIT declaration-related data. The new version of return package requires a distinction to be made between “payments made at home” or “payments made abroad” in declaring three types of period expense breakdowns, and at the same time, distinctions are also to be made among 24 types expense breakdowns including travel expense, premium, shipping and storage expense, packaging cost etc.. Thus, the new return package requires more sophisticated information to be disclosed compared with the set-up of current normal Chart of Accounts of an enterprise.
- Establish and improve the system of internal tax risk control and set clear double-check procedure to ensure the accuracy of declaration data; formulate distinct advance-planning, in-process control and after-review process with respect to tax adjustment items, tax preferences(such as super-deduction), extraordinary events(such as equity transfer, enterprise restructuring, government-sponsored relocation), related party transaction etc.; and ensure proper judgment in each tax-related event, integrity of relevant documents and perfectionism and precision of their expression, standardization of tax declaration and safety of file maintenance, in order to reduce tax risk.
- Strengthen system of tax analysis and periodically conduct in-depth analysis of major tax-related events using both basic indexes (such as economic index, industry data etc.) and analytic indexes(such as income growth rate of staple business, cost change rate of staple business, change rate of VAT burden, the ratio of profit against cost etc.). Once an abnormal situation is spotted, the risk should be dealt with in a timely way.