With a view to mobilising the general public to monitor tax collection work, a reward system is introduced under the new rules whereby tax authorities will offer rewards to informants according to the extent of their contribution. The State Administration of Taxation (SAT) and Ministry of Finance (MOF) will jointly work out the relevant details for implementation.

Tax Registration Mandatory for Opening Bank Account

From now on, taxpayers engaged in business operations must complete tax registration before they can open bank accounts or apply for tax exemption and reduction, business suspension and business termination.

In a bid to strengthen supervision by tax authorities, the rules provide for a strict tax registration system. To enable information sharing, SAT and local tax authorities will assign the same tax registration code to the same taxpayer. Taxpayers engaged in manufacturing and business operations should register with the local tax office where the manufacturing or business activity is located within 30 days of obtaining a business licence. They should complete the tax registration form truthfully and submit the relevant documents and information to the tax office. Taxpayers should present their tax registration certificate when applying for the following: opening of bank accounts; tax exemption, reduction and rebate; extension for filing tax return and making tax payment; purchase of invoices; business suspension, termination and other related matters.

Illegal Tax Evasion a Target for Investigation

Some multinational companies evade taxes in China by means of irregular business deals and capital flows among associated companies. The new rules contain detailed measures to clamp down on these activities.

Under the rules, an enterprise is deemed to be associated with another company, enterprise or economic organisation defined in the Tax Collection Law if it falls under one of the following categories:

1. Direct or indirect ownership or control in terms of funding, business operation, and purchase and sale;
2. Direct or indirect ownership or control by the same third party;
3. Other forms of relationship involving common interests. Taxpayers are obliged to provide to the tax office information such as pricing and fee standards used in conducting business with their associated companies.

The rules also provide for the tax authorities to adjust the payable tax amount if the taxpayer is found to carry out business activities with its associated companies in one of the following ways:

1. Purchases and sales are not priced in the way such activities are usually conducted between independent companies;
2. The interest paid for or received from circulating funds is higher or lower than that generally accepted by enterprises that are not associated with each other; or the interest rate is higher or lower than that adopted by businesses of the same nature;
3. The provision of labour service without compensation, which is contrary to normal practice between unrelated companies;
4. The transfer of assets or the rights to assets without compensation, contrary to normal practice between unrelated companies;
5. Other situations where compensation is not involved, contrary to normal business practice between unrelated companies.

As for adjusting the taxes payable by associated enterprises, four computation methods are set out: 1) using the prices normally adopted by unrelated enterprises in conducting business activities of the same or similar nature; 2) using the revenue level and profit margin normally involved in re-selling to an unrelated third party; 3) adding reasonable fees and profit margins to the costs; 4) other forms of reasonable charges.

Income under Close Scrutiny

The so-called "Tax Eye" monitoring device will be promoted to all taxpayers. The new rules stipulate that taxpayers should comply with the requirements of tax authorities in installing and using this tax-monitoring device and supplying the relevant data and information to them.

The rules also contain a provision concerning small-scale taxpayers who do not have the capability to keep their books or hire qualified personnel to do so. These small-scale taxpayers may keep the print receipts of payment and income, and maintain a log on all purchases and sales, or they may make use of the new tax-monitoring device.

According to an SAT official, in order to combat tax dodging and evasion, it is important to keep track of taxpayers' incomes. Although there are many different methods of tax collection, it is imperative to have a good grasp of the tax base. Right now, the most effective means is the tax-monitoring device. With the installation of the device at points of sale such as taxi meters, cash registers and gas refill pumps, the relevant data will become accessible by the tax authorities, thereby effectively monitoring the tax sources.

Three Targets of Income Tax Collection

The State Administration of Taxation (SAT) has recently identified three targets for beefing up its tax collection efforts, namely individual income tax, domestic enterprise income tax, and foreign-invested enterprise income tax.

Individual income tax. With a view to strengthening tax collection involving income from business operation, salary, interest, share dividend and bonus, a tax withholding system will be fully implemented. The system is specifically targeted at performing artists who appear in advertisements. In addition, tax collection concerning individual investors will be strengthened while the tax withholding system will be closely monitored.

Domestic enterprise income tax. Unauthorised tax incentives offered by local governments to domestic enterprises will be terminated. Checks will be carried out to verify the eligibility of enterprises that currently enjoy income tax concessions. Those found to be unqualified will cease to enjoy the incentives and will be asked to make up for the difference in tax payment.

Foreign-invested enterprise income tax. Greater efforts will be directed at large multinational companies. Checks will be carried out to rectify the tax incentives currently enjoyed by FIEs. Monitoring of the tax withholding system will be stepped up and tax evasion investigation work strengthened.

Beijing Keeps Close Watch on Taxpayers

Beijing's latest policy requires all designated key taxpayers as well as individuals earning an annual income of Rmb100,000 or above to register with the local tax bureau. Meanwhile, the number of key taxpayers to be monitored by the bureau will be increased from 30,000 to 350,000.

On 26 September, the Beijing local tax bureau announced the provisional measures for strengthening individual income tax collection from key taxpayers. A new individual income tax management information system was introduced on the same day. The capital city will build up a database of key individual income tax payers by the end of this year. The new measures will be implemented starting 1 November 2002. By 1 January 2003, key taxpayers and withholding agents will be able to file their tax returns online.

According to the measures, key taxpayers refer to individuals with an annual income of Rmb100,000 or more, as well as the following five types of people:

1. The legal representative, general manager or key personnel of individual income tax withholding agents;
2. Individuals who earn salary income from two or more sources in a given month and with no withholding agent;
3. Individuals who earn income from non-mainland sources (including Hong Kong, Macau and Taiwan);
4. Foreign nationals with tax obligations as stipulated in tax laws;
5. Individuals designated by the tax authorities as having the obligation to file tax returns.

Key taxpayers are required to file tax returns within the first seven days of the month following receipt of the income (unless otherwise stipulated by law) regardless of whether their withholding agent has withheld the tax payable or whether the income concerned has reached the tax threshold. Returns may be submitted via Beijing local tax bureau's individual income tax management information system or other acceptable formats.

Shenzhen Customs Tighten Tax Supervision

Shenzhen Customs have recently launched a campaign whereby enterprises with annual export value exceeding US$10 million and those dealing in sensitive products are required to carry out self-examination and reporting on tax matters.

The scope of self-examination covers three major areas, namely compliance with customs rules, internal control system and bookkeeping status; and six questions have to be asked:

1. whether prices are understated when a contract is filed for records;
2. whether prices are understated in customs declaration;
3. any cases of over-reporting of contracts especially in domestic sales;
4. any cases of delivery without completing factory transfer procedures;
5. any cases of over-stating unit consumption and the extent of wear and tear;
6. any cases of materials shortage and other acts of non-compliance.

The objectives of this campaign are to standardise the behaviour of enterprises and plug the loophole in tax dodging.

Steel Plates Subject to 17% Special Tariff

According to China's Customs Statistics, imports of medium thickness stainless steel plates (HS code 72191200) which are subject to temporary safeguard measures have reached the quantitative quota as of 19 September 2002. A special tariff of 17% has been levied on such imports with effect from 20 September 2002.

Foreign Firms to Pay Tariffs and VAT on Equipment Imports

Preferential tax treatment for certain imports has been adjusted as of 1 October 2002. The scope of tax exemption will be narrowed; the "tax first, rebate later" policy will be implemented on equipment imported by companies that export all their products; and applications for import tax exemption or reduction will no longer be accepted.

Adjustment of tax policies for projects approved before 1 April 1996

As of 1 October 2002, tariffs and imported-related VAT will be levied on all imports except the following:

1. Technological transformation and infrastructure projects (including major construction projects) approved before 1 April 1996.
   
   
2. Equipment imported for own use by foreign investment projects, including projects utilising foreign government loans and loans from international financial organisations (excluding goods listed in the Catalogue of Commodities Imported by Domestic Investment Projects Not Eligible for Tax Exemption and Catalogue of Commodities Imported by Foreign Investment Projects Not Eligible for Tax Exemption).

Imports that have been issued a Tax Exemption Certificate before 1 October 2002 will be tax exempted if the goods are imported and declared on or before 31 December 2002. However, the certificate is not extendable. The issuing customs authority will change the expiry date to 31 December if the validity of the certificate extends beyond 31 December.

Adjustment of policy regarding foreign investment projects under the permitted category

1. Equipment imported by "foreign investment projects that export all products" in the Catalogue for the Guidance of Foreign Investment Industries approved on or after 1 October 2002 will be levied tariffs and import-related VAT. A joint inspection group formed by MOFTEC and the departments concerned will conduct inspection of the direct export of the products of such projects over a five-year period as from the date the project goes into operation. If the products are indeed exported as claimed, tax paid will be reimbursed at a rate of 20% per annum over a five-year period until all tax paid has been refunded. In case of foul play, tax paid will not be reimbursed and any returned tax will be re-levied. Punishment will also be imposed in accordance with law.
   
   
2. Equipment imported by "foreign investment projects that export all products" approved before the policy adjustment will remain tax exempted. However, the departments concerned will inspect the direct export of the products of these projects over a five-year period as from the date the project goes into operation. For projects that have completed their equipment imports, products exported prior to the policy adjustment will not be inspected, but products exported during the remainder of the inspection period after 1 October 2002 will be inspected on a selective basis.
   
   
3. The newly-approved measure of tax rebate for equipment imported by "foreign investment projects that export all products" over a five-year period will be implemented in accordance with the Circular on Tax Rebates for Certain Imported Commodities jointly published by the Ministry of Finance, State Economic and Trade Commission, State Administration of Taxation and General Administration of Customs.

Applications for tax exemption or reduction no longer accepted

Henceforth, applications for tax exemption or reduction will not be entertained. Raw materials imported for production, 20 categories of imports that are denied tax exemption or reduction by the State Council, and vehicles imported for big events will not be eligible for tax exemption. For other commodities that merit import tax exemption or reduction, the Ministry of Finance and other relevant departments will exercise strict control and seek approval from the State Council.

First Batch of Import Commodities Subject to Inspection and Quarantine

China's newly revised Import and Export Commodity Inspection Law took effect on 1 October 2002. Entry-exit inspection and quarantine authorities will enforce the new rules on the first batch of products listed in the Catalogue of Import Commodities Subject to Inspection by Entry-Exit Inspection and Quarantine Authorities. The items concerned can only be imported into China if they are accompanied by an import commodity safety and quality licence or the "Great Wall" mark or "CCC" mark certification.

The revised Law carries new provisions regarding the reporting party, location of inspection, deadline for inspection and validity of inspection. For instance, the location of inspection has been changed to "inspection department at customs declaration checkpoint", and the deadline for inspection has been revised to "within the period as stipulated by the state inspection authorities". Moreover, inspection personnel will no longer be stationed at factories.

The new Law has also given more responsibilities and obligations to inspection authorities and their personnel. For example, they are obliged to undertake confidentiality and should set up a sound internal monitoring system.

The new Law, representing the first piece of legislation amended following China's WTO accession, has been designed to provide a legal framework for resolving new issues in import-export trade in the post-WTO era. Old practices which did not conform to WTO rules have been removed, while those clauses which did not apply to the actual operation of import-export commodity inspection work have also been amended.

First introduced 13 years ago, the Law had become outdated and incapable of handling new issues as a result of the rapid development of China's market economy. In particular, China's WTO accession has ushered in a new era with new requirements on inspection work.

HKTDC and the Shenzhen Entry-Exit Inspection and Quarantine Bureau will jointly organise a briefing on the new rules. Interested Hong Kong companies should watch out for details.

Inspection Exemption Rules Effective in October

The newly amended Measures for Import and Export Commodity Inspection Exemption passed by the State General Administration for Quality Supervision and Inspection and Quarantine (AQSIQ) in July became effective on 1 October 2002. The new rules will replace the old version enacted in 1994.

Import and export commodities listed in the Catalogue of Import and Export Commodities Subject to Mandatory Inspection can be exempt from inspection upon AQSIQ approval. Application can be made by the consignee, consigner or manufacturer.

Products applying for exemption must meet specific requirements listed in the revised measures, which include a new clause stating that such products must have their own brand names and occupy a leading position in the industry in their country/region of origin in terms of product ranking and quality. In addition, the products must enjoy a good reputation in the international market, with no quality defects, claims and return goods attributable to the manufacturer, and the passing rate of product inspection for the past three consecutive years must reach 100%.

However, certain products are not eligible for exemption. They include foodstuffs; animals and plants and their products; dangerous goods and their packaging; products with a highly variable quality; and bulk goods. The new measures, which have removed toys, cosmetics and electrical appliances from the old list, represent a more relaxed policy.

For details of the new measures, please visit the AQSIQ website at www.ciq.gov.cn/cgi-bin/detail.cgi?classid=00000000000000009313.

New Anti-Money Laundering Rules

Speaking at China's first national conference on anti-money laundering, governor of the People's Bank of China (PBOC) Dai Xianglong said the central bank will soon formulate and promulgate the Regulations for Financial Institutions on Anti-money Laundering.

According to Dai, PBOC will also introduce a number of related rules such as Rules on Management of Payment Transaction Reporting and Provisional Regulations on the Reporting by Financial Institutions of Large Amount and Suspicious Foreign Exchange Funds.

It was confirmed at the conference that a system to analyse, monitor and report on financial transactions as well as a mechanism for information exchange will be set up in a bid to stem out anti-money laundering crimes. Several major tasks have been identified in this regard: better cash management, standardisation of account management, strengthening foreign exchange control, clampdown on underground financial activities, strict enforcement of the Regulations on Real Name System for Personal Savings Accounts and other related documents issued by PBOC, as well as strengthening education on anti-money laundering. In addition, China will continue to enhance international cooperation to fight money laundering and terrorist financing.

To date, China has introduced a series of regulations and measures on standardising financial transactions. For instance, PBOC and the State Administration of Foreign Exchange (SAFE) have issued various regulations and documents and implemented the real name account holder system. These rules include Measures for the Administration of Bank Account Management, Measures for the Administration of Foreign Exchange Accounts within the Mainland, Circular on the Administration of Large Amount Cash Payments, and Rules on Reporting of Large Amount Cash Payments. Meanwhile, commercial banks have also formulated similar measures.

In September 2001, a leading group was set up within PBOC to spearhead anti-money laundering efforts. In July 2002, an anti-money laundering unit and a payment transaction monitoring system were established to carry out implementation. Some commercial banks have also formed their own anti-money laundering mechanisms.

SAFE Announces Administrative Review Procedures

The State Administration of Foreign Exchange (SAFE) has recently promulgated two sets of procedures on administrative review and administrative penalty hearing respectively giving people charged with felony the right to request for a hearing to be held where they can recount, defend and examine evidence before a judgement regarding serious punishments is made by SAFE.

According to the procedure on administrative penalty hearing, serious punishments include suspension or termination of forex settlement business; suspension of forex trading or suspension of forex trading licence; and large fines. The procedure clearly defines the scope, criteria, processes and report of such hearings so as to regulate penalties with regard to forex in a fair and open manner.

The procedure on administrative review stipulates that any citizen, legal entity or organisation can apply to the respective foreign exchange administration for an administrative review if they are of the opinion that certain actions of SAFE have infringed upon their legal rights. The procedure states clearly the application for and scope, eligibility and decision-making processes of administrative reviews.

SAFE Steps Up Forex Account Management Reform

On 28 September 2002, SAFE issued a circular and implementing rules announcing further reforms of managing forex current accounts. The move aims to prepare China for the new landscape after WTO entry, create an environment for fair competition among domestic enterprises and foreign-invested enterprises (FIEs), as well as promote China's foreign economic and trade development.

The new policy further relaxes the criteria for domestic enterprises to open forex current accounts while at the same time aligns the policies for domestic enterprises and FIEs. Domestic enterprises approved to conduct foreign-related business or generate forex income can now apply to SAFE for opening a forex current account and keep their forex income in the account.

Also, SAFE has consolidated over 20 different types of settlement accounts and special purpose accounts into one "forex current account" so as to implement unified management. SAFE will promote a nationwide forex account management information system to enhance the computerisation of forex account management.

The new policy has lowered the threshold for opening forex current accounts, making it possible for small and medium-size enterprises to handle forex receipts and payments directly through the account. These enterprises stand to gain from cost reductions in forex settlements and purchases and can hence boost their export and foreign trade business. The initiative also creates an environment for fair competition by aligning forex current account management policies for domestic enterprises and FIEs. Other benefits include better allocation of forex resources and giving enterprises more free hand in forex control. In view of this, the new policy sets the tone for the transition from mandatory to voluntary forex settlement, facilitating China's forex settlement and purchase system reform. The popularisation of the forex account management information system will also support the regulation and streamlining of forex account management procedures, enabling enterprises and banks to improve their efficiency.