Tag:tax-tax-compliance-and-tax-planning
I. Overview
The Shanghai Municipal Tax Service, State Taxation Administration recently formulated the “Measures of Shanghai Municipal Tax Service for the Administration of Advance Tax Rulings (for Trial Implementation)” (Hu Shui Ban Fa [2023] No. 33, effective on December 29, 2023, "Measures"). The Measures aim to standardize and enhance the process of advance tax ruling ("ATR") in Shanghai, in accordance with the government’s goal of improving tax services and administration for large enterprises, thereby enhancing certainty in the application of tax rules.
ATR provides a proactive means for taxpayers (and withholding agents) to navigate the complexities of tax law, ensuring they can make informed decisions while remaining compliant with their tax obligations.
The Measures represent a significant step for Shanghai towards reinforcing a stable, transparent, and business-friendly environment, while also embodying the government's commitment to rule-based governance and responsive administration.
II. What is Advance Tax Ruling
The Measures define ATR as a service provided by tax authorities, rooted in mutual trust between tax authorities and enterprises, initiated in response to applications from enterprises for guidance on applying tax laws and regulations to complex future tax-related matters. The tax authorities, relying on current tax laws and regulations, provide written opinions on the application of tax rules.
III. How to Apply for ATR
According to the Measures, ATR is applicable only to corporate taxpayers in Shanghai, with individual taxpayers currently ineligible. Moreover, ATR does not apply to certain matters, including:
1. Matters that lack a definite project plan or will not occur within two years;
2. Matters that lack reasonable business purposes or are explicitly prohibited by laws and regulations;
3. Matters for which current tax laws and regulations have clear provisions that can be directly applied;
4. Other matters not applicable for ATR.
Taxpayers (“Applicants”) wishing to apply for ATR can submit their applications to either the municipal or district-level tax authorities. The application should include the following documents, as applicable:
- An ATR Application Form; in which the Applicant should detail the content of the application, including matters for ruling, preferential opinions, impacts on business operations and tax payments, related enterprises, applicable tax years, etc., and the legal basis;
- An ATR Acknowledgement Form;
- Consents from other competent authorities (if required);
- Supporting documents, such as contracts, agreements, meeting minutes, or feasibility study reports;
- Any other information required by the tax authorities.
If the ATR application is accepted and decided upon, the reviewing tax authority will issue an ATR Opinion Letter to the Applicant. The Opinion Letter will include details such as the related enterprises, tax matters, ATR opinions, and the legal basis.
The ATR process can be terminated before the issuance of the Opinion Letter under the following circumstances: (1) upon the Applicant's request for termination; (2) when the Applicant fails to provide necessary information, making the review impossible to proceed; (3) upon identification of other circumstances warranting termination of the ruling process.
It's important to note that the Measures do not specify a particular deadline for issuing the Opinion Letter.
IV. Implementation of ATR Opinions and Follow-up Reviews
ATR aims to enhance tax certainty through adherence to the guidance of ATR opinions by both taxpayers and tax authorities. The Measures stipulate that implementing ATR opinions is subject to certain conditions: (1) the documents submitted by the Applicant must be lawful, true, accurate, and complete; (2) the anticipated tax-related matters must proceed as described in the application documents; and (3) the applicable laws and regulations referred to in the ATR opinions must remain in force.
Furthermore, ATR opinions apply only to the matters submitted for ATR review by the Applicant, and do not apply to other taxpayers or matters not reviewed or decided during the ATR process.
Competent tax authorities will conduct follow-up reviews on ATRs. In the event of any substantial change relating to the factual or legal basis of the ATR opinions, the competent tax authority can request termination or revocation of the ATR opinions. Moreover, the Applicant is obliged to notify the competent tax authority within 30 days of any substantial change, and they may reapply for ATR for subsequent anticipated tax-related matters.
It's important to note that the Measures explicitly state that ATR is a customized tax service for enterprises, and does not constitute an administrative action that substantially affects the rights and obligations of enterprises. Thus, legal remedies of administrative review or court review are not available. In the case of tax disputes, taxpayers need to seek legal remedies regarding the specific administrative action.
V. Significance and Drawback
The ATR system provides a formal procedure for enterprise taxpayers to seek advance rulings on complex tax matters. It is particularly valuable for businesses planning significant transactions where tax implications are uncertain. It offers clarity on tax rule application, ensuring that taxpayers can make informed decisions while remaining compliant with their tax obligations.
Under the current tax administration approach emphasizing "streamlining administration and decentralizing powers, combining decentralization with appropriate control, and optimizing services," taxpayers are allowed to apply and enjoy certain tax rules, based on self-assessment and filing of or retaining supporting documents for follow-up reviews. This approach can bring taxpayers both benefits and challenges. Mistakes in rule application may lead to tax adjustments or audits, with potential liabilities for late-payment surcharges, penalties, and other administrative sanctions.
The ATR system offers protection to taxpayers by demonstrating their lack of negligence, fraud, or willful misconduct. Thus, administrative penalties or sanctions should not apply in cases of subsequent tax adjustments or audits, and ideally, the 3-year statutes of limitation should apply and bar the imposition of late-payment surcharges.
Despite these benefits, the Measures lack clear authorization and guidance from higher tax laws and regulations and are ambiguous on several points. The ATR system faces challenges of potential conflicts and disputes.
For example, it is not clear if taxpayers have the right to terminate the ATR process, especially when ATR opinions are likely unfavorable. Similar to the procedures of advance pricing arrangements (APAs), it is reasonable to introduce a pre-communication procedure. This aims to inform taxpayers about preliminary ATR opinions and their right to terminate the ATR process at any time. Thus, taxpayers can have opportunities to make adjustments without adhering to the ATR application until a formal Opinion Letter is issued. Moreover, opinions, statements or expressions made by taxpayers during the ATR process should not be used to the detriment of taxpayers in later tax matters or procedures.
Another example is the mechanism of legal remedies. The Measures clarify that taxpayers, concerning the ATR, cannot seek administrative or court review. In case of tax disputes, taxpayers need to seek legal remedies regarding the specific administrative action. However, it presents a potential conflict of interest. The reviewing authority for administrative review may also be the reviewing or decision-making authority for the ATR, potentially undermining the taxpayers’ rights.
In sum, although facing challenges of potential conflicts and disputes in the absence of clear guidance from superior laws and regulations, the Measures mark an important milestone in tax administration by providing taxpayers a way of achieving tax certainty. For taxpayers, while utilizing the benefits of the ATR system, well-founded legal analysis is extremely important to achieve a favorable ATR outcome.
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