Observation: Escalating Difficulties in Company’s Tax Refunds

In 2024, the Chinese government is facing a decline in the country’s tax revenues. The decrease of tax revenues not only leads to more frequent tax inspections but also escalates difficulties when companies across the country apply for various tax refunds. It is a common observation that the application process has become more intricate and time-consuming, for value added tax (VAT) credit refunds, corporate income tax (CIT), individual income tax (IIT) refunds, and so forth.

On 25 October 2024, the Ministry of Finance of the People’s Republic of China published the data for the nation’s fiscal balance for the first three quarters of 2024. According to the report, the general public budget revenue amounted to 163.06 trillion RMB, marking a 2% decrease compared to the previous year. Tax revenue, specifically, totaled 1,317.15 billion RMB, indicating a 5.3% drop from the previous year. The subsequent section presents an overview of the main tax items:

Except for the slight increase in import VAT and consumption tax, tax revenues from other major taxes exhibited a downward trend. Under the pressure of tax collection, it is unsurprising that the tax authorities in China tend to exercise more rigorous controls over tax refunds, particularly for companies applying for tax refunds of considerable amounts.

• During the review procedure, the tax authorities may request the companies to submit various supporting documents related to the tax refund matter or the company’s general financial situation. These could include the breakdowns of certain financial accounts, commercial contracts and invoices, bank transaction statements, etc.
• The understanding of tax rules is often different among different tax authorities. As each tax refund application must be approved by various level of tax officials, the outcome is with huge uncertainty, because the result made by one tax official could be rejected by the superior tax official.
• The time frame for the tax refund process has also lengthened considerably. What used to be a relatively quick procedure is now often protracted for an extended period. It is common for companies to undergo rounds of communication and negotiation with the tax authorities until an alignment can be reached.
• In some cases, if the tax authorities identify potential risks while reviewing the documents, the application for tax refunds may even trigger a comprehensive tax inspection.
• In certain areas, local tax authorities may not implement the tax rules precisely and strictly when they have enough tax revenues. However, in a situation that tax authorities have to chase tax revenues, they may change the interpretation of the tax rules which makes the tax refund more difficult, if not impossible.

The challenges associated with tax refunds have significantly contributed to the complexity and workload of the application process. For companies, this not only entails a financial cost in the form of cash flow but also disrupts their normal financial operations and poses potential risks to the company.

Given these circumstances, it is crucial for companies to adopt proactive tax planning that aligns with business development and financial forecasting, to maintain a stable tax performance. Ensuring the accuracy of tax declarations and payments from the outset is the best strategy. If a tax refund is necessary, a self-review can help prepare companies for potential hindrances in the refund process and minimize adverse effects.

In the current challenging economic climate, we suggest that companies should exercise caution when considering tax refund applications and always maintain a compliant tax position.