In recent years the Chinese government has progressively replaced administrative pre-approvals, for various tax treatments and regulatory licenses, with recordal requirements. This has been coupled with more targeted and effective procedures for follow up audit and review.

In the Corporate Income Tax (CIT) space, State Administration of Taxation (SAT) Announcement 76, issued in 2015, provided that all CIT preferential treatment pre-approvals would be fully replaced by a recordal requirements. Taking the next step, SAT Announcement 23, issued on 25 April 2018, now abolishes the recordal requirement. Instead, new, simplified, self-assessment procedures will apply, starting from the CIT annual filing for the 2017 tax year.

Building on Announcement 76, Announcement 23 makes several changes:

• Simplified procedures for claiming CIT benefits: Taxpayers are now required to assess for themselves whether they qualify for the CIT preferential treatment, and declare the CIT incentives they adopted in their CIT annual filing. They are no longer required to send documentation, up front, to the tax authorities for consideration. Instead, taxpayers are required to keep supporting documentation on file, in case of future audit.
• Supporting documents classified as “principal” or “other” documents: Taxpayers are required to collect and maintain on file the tax relief supporting documents, listed as “principal documents” in the 2017 version list. Documents listed as “other documents”, by contrast, do not need to be maintained on file, but may need to be resourced by the taxpayer, if and when the authorities request them in clarification of uncertain matters.
• Follow-up administration. Under Announcement 23, taxpayers in thesoftware and integrated circuit (IC) sectors, who have claimed CITbenefits, must submit their principal supporting documents to theauthorities before the deadline of CIT annual filing (i.e. 31st May). Forother taxpayers, the follow-up tax administration requirements will be setout by their provincial tax authorities. Tax authorities will strengthen theirfollow-up administration.
• Updated list (i.e. “2017 version”) of CIT preferential items: There is abroad range of CIT preferential items including tax exemptions, tax basisdeductions, super deductions, accelerated depreciation, tax credits, taxrate reductions, etc. The 2017 version of this list, replacing that from2015, introduces greater consistency between the listing and the variousCIT filing forms.
  

Announcement 23 is a welcome development fortaxpayers, as the self-assessment system should lowerthe compliance burden for accessing various incentives,such as the 15% CIT rate for High and New TechnologyEnterprises. The new rules are in line with the SAT’sbroader program to simplify tax administration, set out in2017 in SAT Circular No. 101.

At the same time, the new approach, by shiftingresponsibility to taxpayers to ensure they fully meet theincentive criteria, increase their risk of penalties if anadopted incentive is later determined inappropriate onaudit. As such, taxpayers may consider makingenhancements to their internal risk control systems forbetter oversight over incentive treatment evaluation anddocumentation processes, as well as seekingprofessional advice, as necessary.