As explained by the Beijing tax bureau, the main objective of the CRT (creditability ratings of taxpayers) system is to let taxpayers better understand the importance of creditability in tax compliance and to allow tax authorities to adopt a more systematic approach for tax administration.

The rating for each taxpayer will be assessed by using a "Rating Form for Creditability in Tax-compliance for Taxpayers". The assessment result will be stated in a confirmation notice issued to the taxpayer.

Factors, such as a taxpayer's tax registration, tax-filing practice, the tax-payment status, tax-audit history, invoice management, accounting-book management and creditability ratings given by other authorities, will all be considered for assessment purposes.

Taxpayers rated A will be waived for tax audits for two years and their names will be announced to the public through the Internet and/or media.

These taxpayers will find it easier to obtain support from the government and financial institutions because of their high creditability and will likely gain a competitive edge over companies of lower ratings.

In contrast, taxpayers rated C will not only be put on the watch list as important audit targets, but will also face intense scrutiny by the tax authorities, e.g. restrictions in applying for value-added tax invoices, and tax-filing documents being subject to close reviews.

The ARTA (adoption of access rules for tax audits) system prescribes that tax-field audits are allowed only if the relevant tax issues cannot be resolved in writing or with scheduled interviews.

The bureau believes that many non-compliance issues of taxpayers are not intentional, but caused by lack of knowledge on the tax laws. Thus, before the bureau decides to conduct a routine tax audit based on findings from desktop reviews, it will first notify the relevant taxpayer of the apparent non-compliance in writing and ask for explanation/rectification within a limited time.

Alternatively, the bureau may also invite the relevant taxpayer to an interview and listen to the taxpayer's explanation for the apparent non-compliance issues face to face.

If the bureau is satisfied with the taxpayer's explanation, the case will be closed. If the bureau finds that additional tax is due from the taxpayer, it will order the taxpayer to pay it. As long as the taxpayer pays the delinquent tax promptly, a tax-field audit will not be warranted.

The virtue of the ARTA system is that it regulates tax authorities' unconditional power to conduct tax audits as granted by the tax administration laws and regulations.

Before ARTA became effective in Beijing, the tax authorities were allowed to conduct tax-field audits on taxpayers any time as long as they found the taxpayer suspicious for tax non-compliance.

The ARTA system not only gives more respect to taxpayers but also helps reduce negative impacts of "routine" tax audits on the operations and reputations of taxpayers. Moreover, the ARTA system also alleviates the administrative burden of tax audits on both tax authorities and taxpayers.

Under the ARTA system, there are two situations where tax authorities shall be restricted in tax audits:

1. When a tax audit on a particular taxpayer was already conducted in the past one year (except for reported cases, handover cases, and cases involving information exchanges);

2. When the threshold conditions for routine, special or case audits are not met.

Further, without going through proper procedures such as written notices and interviews (except for reported or special cases), tax authorities are prohibited from conducting tax audits on taxpayers. The tax officers violating the ARTA rules will be subject to administrative and/or economic penalties.

Next week we will discuss some practical issues in the CRT and systems taxpayers should be aware of.

* Petrina Tam is a partner of the China tax practice of PricewaterhouseCoopers in Hong Kong; Cathy Jiang is a manager of the China tax practice of PricewaterhouseCoopers in Hong Kong.

(HK Edition 09/04/2003 page7)