In order to have an insight into the quality of tax collection and management of the taxation departments, the National Audit Office of China(CNAO) organized 17 local inspectors offices from September 2003 to January 2004 to audit the tax collection and management of the taxation organs from 2002 to September 2003 in the 35 cities (prefectures) of the 17 provinces (autonomous regions and cities) that had highly concentrated tax funds and focused on the random sampling of the tax returns, tax payments and the enforcement of the preferential tax policy of the 788 enterprises as well as the tax losses.
Some taxation departments while accomplishing the annual plans for tax revenues given to them by the higher-level organs, succumb to the local governments pressure, artificially control the speed with which the tax revenues are handed to the state treasury, and retain the taxation funds in the enterprises.
In 364 (46.19%) of the 788 enterprises there existed such problems. From the end of 2002 to September 2003, there were 10.632 billion and 10.295 billion yuan that failed to be transferred to the treasury as they should have been. The taxation departments have the following practices: in cases where the firms have sufficient monetary resources, the taxation departments are not eager to tax them.
For instance, against the background of the 800 million-plus yuan of bank savings balance of the Kunming Steel Group Co. Ltd., the Anning city state taxation bureau of Yunnan Province deferred to 2003 the company s treasury-bound 153 million yuan in taxes of the year 2002. The same was true of the Yuetang taxation branch of the Xiangtan city state taxation bureau that failed to submit to the treasury the company s newly added outstanding taxes on value-added amounting to 45 million yuan of that year in view of the fact that the Xiangtan Steel Group Co. Ltd., had more than 300 million yuan in monetary funds at the end of 2002.
Second, the taxation departments approve the deferred tax payment at variance with the regulations, thereby leading to late tax submissions to the treasury. The Heilongjiang state taxation bureau was a case in point. In 2002 it took a monthly or seasonally deferred tax payment approach to the Daqing Oil Field Co. Ltd., Harbin Pharmaceutical Group and other 12 businesses that had the capability of paying the year s taxes.
And as a result, by the end of that year, there were still 3.772 billion yuan of taxes pending. Third, the taxation departments adjust the revenues by tax refunds from the treasury under the pretext of refunding the tax collected by mistake in violation of the regulations. For example, the Xiangfang branch of Harbin city taxation bureau refunded the 5.
597 million yuan in individual income tax from the treasury to the Heilongjiang mobile phone company that had returned at the end of 2002. Not until January 2003 did they re-collect the taxes for the treasury.
The audit findings further discover that the state and local taxation bureaus influenced by their respective tax plans have either overtaxed or under-taxed the individual taxpayers. The Xinle local taxation bureau of Hebei Province overcharged the Xinle Guoren Beer Co. Ltd., of Shijiazhuang City 18.59 million yuan in urban construction and income tax despite the fact that the company had not owed133 million yuan of value-added and consumer taxes (the two taxes that the state taxation should have levied).
The Hong an county local taxation bureau of Hubei Province overtaxed the Hong an Tobacco Factory by 45.22 million yuan in urban construction taxes against the background that the factory owed 223 million yuan in the value-added tax and consumer tax at the end of December in 2002.
Of the 35 cities (prefectures) audited, 19 cities (prefectures) had the situations where the local governments intervened in the tax policy enforcement and went beyond their purviews in tax reduction or exemptions. Of the 788 firms audited, there were 48 (5.83%) firms enjoying various tax reductions and exemptions authorized by the local governments in violation of their purviews.
From 2002 to September 2003, five units including the financial bureau, local taxation bureau, state taxation bureau of Shaanxi Province authorized by the provincial government reduced the tax rate of highway operation income of the Jinxui Transport Co. Ltd., from 5% as prescribed by tax law to 3% when collecting the business taxes and surcharges, and as a result, the company paid 2.
77 million yuan less in taxes. The year 2002 witnessed the Xiaoshan local taxation bureau of Hanzhou City motivated by the local government policy extended the state- prescribed income tax breaks for the new-formed non-employment service company to 21 such companies, thereby reducing or exempting the income taxes to the tune of 17.
1435 million yuan.
It is further found that part of the local governments develop their own tax rebate policy to lure foreign investments in violation of the State Council regulations. This not only impairs the seriousness of the tax law, but also aggravates the unfair competition among the firms and leads to the disorderly movement of some firms to different places in order to pursue the tax breaks.
In Helin County of Huhehot City, the Shengle economic zone devised a tax rebate policy on its own and refunded to the firms all the income taxes levied by the taxation bureau. In 2002 alone, the Mengniu Diary Joint Stock Company was refunded over 49 million yuan.
Of the 788 firms audited, 2.76 billion yuan of 169 (21.4%) firms tax revenues were lost due to the haphazard tax collection and management. To be specific, part of the taxation organs broadened the tax break scale without authorization or bend the policy to approve the tax reductions or exemptions. The audit has found that 83 businesses had such problems resulting in 2.
052 billion yuan less in taxes. From 2002 to September 2003, the Shanghai state taxation bureau and the sixth branch of the local taxation bureau approved the Shanghai Nonggongshan Supermarket Co. Ltd. to pay half of the company s income tax, i.e., 133.33 million yuan against the backdrop that the preferential tax policy it enjoyed had expired and the ratio of new staff employed that year was not up to the standard set by the state.
Second, the loss of taxes was also caused by the less strict scrutiny of the tax retuned by the enterprises. Third, no prescribed delinquent taxes were paid for the taxes long overdue. The inspection bureau of the Wuxi state taxation bureau did not levy delinquent taxes on the back taxes of all the inspected cases in 2002.
According to the 21 enterprises that topped the tax amounts in inspected cases from 2002 to September 2003, the delinquent taxes involved totaled 15.4986 million yuan. Fourth, part of the preferential tax policies were approved by multiple links and managed by multiple sources, leading to part of the tax-payers taking advantage of the loopholes and the loss of the state tax revenues.
The Sci-tech Bureau in Nanjing certified the Nanjing Pharmaceutical Co. Ltd. that dealt in merchandize flow, the Hongxingda Communication Business Co. Ltd., Nanjing that dealt in mobile phone sales, recreational and printing businesses and the Nanjing Water Transport Co. Ltd., that engaged in cargo transport on the Yangtze River as hi-tech companies, and the taxation department approved the reduction or exemption of taxes amounting to 56.
678 million yuan from 2002 to September 2003.
(1) The evaluation mechanism of the tax collection needs to be further improved, and efforts to create an environment for tax-collection and management pursuant to law should be made. Currently, the taxation organs at various levels still adopt a base plus growth rate approach to the formulation of the tax collection plans and distribution of the tax collection workload.
True, such an approach has its historical background, and has played a positive role in the sustainable and rapid growth of the taxes. But the plan tends to deviate from the reality, and besides, the way the taxation plan is accomplished is one of the major components in the evaluation of the performance of the lower-level taxation organs by the higher-level taxation organs and the direct point of reference when the governments at various levels judge and reward the taxation departments.
Under such a tax management and evaluation mechanism, the taxation organs tend to delay and cut back on the tax revenues in order to avoid an oversize base upon accomplishment of the tax collection. And when they fail to accomplish the plan, they tend to levy excessive taxes, so it is hard to manage the taxes by law.
Therefore, it is recommended that the State Taxation Administration further perfect the tax collection mechanism, and gradually replace the current tax collection plan evaluation with the comprehensive quality evaluation of the tax levy and management so as to ensure a tax management pursuant to law by the taxation department and do away with the phenomenon of artificial adjustment of the speed with which tax revenues are handed over to the treasury.
(2) Strict control and severe punishment should be enforced with regard to tax evasion. The way the tax is now collected and managed on the basis of the amounts returned by the tax payers on their own and the way the tax evasion is punished are having direct implications on the order of the tax collection and management.
Judging from this auditing, the lax approach to the punishment of tax evaders on the part of the taxation organs has to certain extent played into the hands of the tax evaders. Of the 788 firms audited, 157 were found evading taxes and punished in 2002, and only 48 firms had been fined, and another 57 businesses punished with additional delinquent taxes.
The fine rate and the delinquent tax rate were only 30.57% and 36.31% respectively (by the business / time), far below the penalty criteria prescribed by the tax law. Such a penalty can hardly deter a handful of firms that try to take chances when it comes to paying taxes by law. It is recommended that the taxation organs at various levels strictly punish the tax evasions by law so as to guarantee the seriousness of the tax law.
(3) Efforts should be made to intensify the levy and management and set up a strict accountability system. Currently, the lax approach to the tax law and haphazard tax collection and management has become one of the outstanding problems affecting the tax collection and management. If we delve into the causes, there are indeed the problems of local government interventions, outdated collection means and other external factors, but the lack of a strict accountability system in the taxation system regarding the tax law enforcement is also a crucial factor.
It is recommended, therefore, that the State Taxation Administration should set up a strict accountability system at the earliest possible date. And while empowering the taxation organs and tax collectors to do their best, they should be given to understand the responsibilities, thereby bringing the tax collection and management in line with the responsibilities.
In the wake of the auditing, the Administration collated the information and submitted a special audit report to the State Council while briefing the State Taxation Administration on the relevant situation. The State Council and the State Taxation Administration attached great importance to the audit findings and gave their written instructions.
The State Taxation Administration called a special meeting for deliberation, and briefed a national working conference on tax collection and management on the audit findings, calling on the nation-wide taxation system to make much of the problems found in the audit and resolutely address them. The Administration simultaneously issued a notice for rectification, demanding the taxation organs at various levels to bring in line their ways of thinking, fully realize the importance the audit and supervision have for the tax control by law and upgrade of the collection and management level.
It further called on the number ones of the taxation organs to deal with the problems discovered in the audit. As for those firms that were involved in illegal tax dealings, special tax inspection was carried out in each firm in question, and the problems proved to be factual should be handled pursuant to law.
As regards those wrongdoing tax employees, they must be held responsible in line with the tax law enforcement accountability system. As for those having disciplinary problems, they should be referred to the supervisory department for further action. All the provinces and cities involved were highly motivated and took steps to correct and rectify the situation.
