Editor's Note: Recently, the latest People's Court case library made public a tax-related judicial decision case, the judgement made it clear that the tax late payment fee shall not exceed the amount of tax, which brought the long-disputed issue of whether the tax late payment fee can exceed the principal amount back to the public's field of view. There are views that the late payment fee is different in nature from that of the Administrative Compulsory Law, and that the provisions of the Tax Collection and Management Law should be applied, and that the judgement in this case is inappropriate. In view of this, this article intends to start from the case, analysing whether the tax penalty can exceed the principal for readers' reference.

I. Introduction of the case: late tax payment shall not exceed the principal amount

(I) Basic facts of the case

In December 2015, a court ruled to accept the bankruptcy application against Nanjing Company A. In July 2022, the administrator of Company A issued an information note to a district tax bureau of Nanjing: there was a situation in which it was difficult for Company A to check the accounts in 2009 due to the account books not being found, and the tax bureau later approved the enterprise income tax of Company A in 2009. on 11 August 2022, the tax bureau declared its claims to Company A's bankruptcy The administrator declared the claim, the total amount of the claim was RMB690,909.24, of which RMB343,479.61 was for tax and RMB347,429.63 was for late payment.2022 On 31 August 2022, the administrator of Company A made the "Preliminary Examination Letter for Claim Filing", which held that the late payment for tax could not be more than the tax itself, and the total amount of the claim was finally confirmed to be RMB686,959.22, and for the portion of the claim that was more than the principal amount of tax 3950.02 yuan, the administrator did not confirm. The tax bureau then sued to a Nanjing District Court. On 5 January 2023, Nanjing District Court made a civil judgement No. 15643 (2022) Su 0115 Minchu, confirming that the tax bureau had a bankruptcy claim of RMB 3,950.02 for the tax owed by Company A, which exceeded the limit of the principal amount of the late payment. Company A did not accept the first instance judgement and appealed to Nanjing Intermediate Court.

(ii) Opinions of the Court of Second Instance

The Court of Second Instance held that the imposition of late payment fees by the tax authorities in order to force the taxpayer to fulfil its obligation to pay tax in accordance with the law was a form of administrative enforcement by the tax authorities. The Tax Collection and Administration Law and its implementing regulations stipulate the starting and ending time and calculation standard of the late payment fee, and for the matter of late payment fee, the Administrative Compulsory Law clearly stipulates that the administrative organ shall comply with the provision that the amount of the late payment fee shall not exceed the amount of the pecuniary payment obligation in the implementation of this act, which shall be applied in accordance with the law. Accordingly, the second-instance judgement revoked the first-instance judgement and rejected the tax authority's claim.

After the publication of this case, some people suggested that the nature of tax late payment is different from that of the Administrative Compulsory Law, and that the provisions of the Tax Collection and Management Law should be applied, and that the judgement in this case was inappropriate. Therefore, it is necessary to re-examine the question of whether the tax late fee can exceed the principal amount.

II the key issue of whether the tax late payment can exceed the principal amount

(i) What is the nature of the late payment of tax?

Whether the tax penalty can exceed the principal amount of the key issue is the nature of the tax penalty, in practice, about the nature of the tax penalty is not the same understanding.

There is a view that the tax late payment belongs to interest in nature and has the function of compensation. Late payment of tax is a kind of compensation paid by the taxpayer or withholding agent who fails to pay the tax on time or to settle the tax and occupies the national tax. For example, the State Administration of Taxation on the tax evasion and late payment fees on the approval of the issue (State Taxation Letter [1998] No. 291, has been invalidated) pointed out that: "late payment is not a penalty, but taxpayers or withholding agents due to the occupation of state taxes and should pay a kind of compensation. As long as the taxpayer or withholding agent fails to pay or release the tax in accordance with the provisions of laws and administrative regulations or the period determined by the tax authorities in accordance with the law, the tax authorities shall, from the date of late payment of tax, add a late fee of two thousandths of one per cent of the amount of the late payment of tax on a daily basis". There is also a view that the late payment fee belongs to the administrative penalty and is punitive in nature. The reason for this is that the annualised interest rate of 18.25 per cent on the tax penalty is four times higher than the quoted interest rate of the one-year loan market, which is obviously punitive. In addition, it is also argued that tax late payment fee belongs to the executive penalty, which is both compensatory and punitive. Late payment is a kind of enforcement measure taken by tax authorities against taxpayers and withholding agents who do not fulfil their tax obligations and payment obligations, and it is a compulsory means to urge them to fulfil their obligations. At the same time, the proportion of late payment fee is higher than the ceiling of private lending and borrowing protection interest rate, which indicates that it has a certain amount of compensation for the use of funds.

In fact, the State Administration of Taxation, the legislature and the highest judicial authorities favour the view that late payment of taxes is an enforcement penalty. The Interpretation of the New Tax Collection and Administration Law and its Implementing Rules, compiled by the State Administration of Taxation, makes it clear that "Article 32 employs the simultaneous use of economic aggravation of obligations, legal stipulations, and administrative enforcement measures to prompt taxpayers and withholding agents to fulfil their tax obligations in a timely manner. Late payment is an enforcement penalty." The Law System Working Committee of the Standing Committee of the National People's Congress has also pointed out in its "Interpretation of the Administrative Compulsory Law" that "the imposition of fines or late payment belongs to the enforcement penalty in the doctrine,...... In China, the enforcement penalty is mainly for the non-fulfillment of the obligation to pay fines, taxes, administrative fees, social insurance premiums and other monetary payment obligations ". In addition, the Supreme People's Court Administrative Compulsory Law Research Group in its compilation of "Administrative Compulsory Law Provisions Understanding and Application" also clearly pointed out that "the so-called late payment fee is a kind of payment with a disciplinary nature levied on the payer in excess of the deadline for the payment of taxes, fees and charges. ...... The Tax Levy Administration Law sets out the criteria for late payment fees. For example, Article 32 states ......". From this, it can be seen that the tax late payment fee is a kind of enforcement penalty with a disciplinary nature, which financially aggravates the obligation when the party fails to fulfil the legal obligation and prompts it to fulfil it as soon as possible.

(ii) How should the Tax Collection and Administration Law and the Administrative Compulsory Law be applied?

There is a view that the Tax Collection and Administration Law belongs to the special law and the Administrative Compulsory Law belongs to the general law, and in the event of a conflict in the application of laws, according to the principle that the special law is superior to the general law, the Tax Collection and Administration Law should be applied to the tax late payment, and thus the tax late payment can exceed the principal amount. However, there are contrary views that Article 32 of the current Tax Collection and Administration Law was amended in 2001, while the Administrative Compulsory Law came into effect in 2012, and according to the principle of the new law prevailing over the old one, if the new provisions are inconsistent with the old ones, the new ones should be applied. In addition, it has been suggested that, according to Article 103 and the first paragraph of Article 105 of the Legislative Law, Article 32 of the Tax Collection and Administration Law is the old special provision and the Administrative Compulsory Law is the new general provision, and when the provisions on late payment are inconsistent with each other, they should be reported to the Standing Committee of the National People's Congress (NPC) for a ruling.

In addition to the above discussion, in practice, tax authorities and courts around the world also hold different attitudes towards the question of whether the tax late payment fee can exceed the principal amount.

III. Controversy of Opinions: Whether Tax Late Payment Fee Can Exceed the Principal Amount?

(i) Some tax authorities and courts believe that the late payment fee can exceed the principal amount.

Hunan Provincial Taxation Bureau made a reply to the question of "whether the tax late payment fee can exceed the principal amount" raised by the taxpayers on the internet. The tax late payment fee is essentially a tax collection act, not an act of "imposing fines and late payment fee" stipulated in the Administrative Compulsory Law, which is not applicable to the Administrative Compulsory Law. The Administrative Compulsory Law is not applicable, and therefore, the amount can exceed the amount of unpaid tax. The Tax Bureau of Inner Mongolia Autonomous Region also replied that late payment fee is an act of tax collection and fine in the Tax Collection and Administration Law is an act of administrative penalty, both of which are not acts of "imposing fines and late payment fees" as stipulated in the Administrative Compulsory Law, and therefore both of them can exceed the amount of unpaid tax. The Shenzhen Taxation Bureau also held the same view that the Tax Collection and Administration Law has no upper limit for the late payment fee arising from taxpayers' failure to pay tax in accordance with the prescribed period, and that there may be cases in which the amount exceeds the principal amount. In addition, in practice, some courts also considered that the late payment fee could exceed the principal amount. For example, Shenzhen Hi-Tech Zone Development and Construction Company and Shenzhen Nanshan District Local Taxation Bureau Taxation Administrative Compulsory Measures Appeal Case ((2014) Shenzhen Zhongfa Xingzheng Final Word No. 196); Hainan Yako Film and Television Programmes Production Co. Ltd. and Hainan Provincial Local Taxation Bureau No. 1 Inspection Bureau Other Administrative Acts Case ((2017) Qiong 0106 Xingchu No. 2), and so on.

(ii) Some tax authorities and courts held that the tax late payment fee shall not exceed the principal amount

The Liaoyang Municipal Tax Bureau of the State Administration of Taxation made an Administrative Reconsideration Decision (Liaocheng Tax Reconsideration Decision [2019] No. 5) stating that: "It maintains the processing decision of items (i) to (vii) of the Tax Processing Decision of Liaocheng Local Taxation Quiz Department [2017] No. 204. Late payment of taxes and fees in the above items shall be calculated from the date of late payment of each tax and fee payment, and a late payment fee of five ten thousandths of one per cent of the amount of the late payment of taxes and fees shall be added on a daily basis until the date on which the tax and fee payment is actually paid. According to Article 45 of the Administrative Compulsory Law, the additional late fee shall be limited to double the principal amount of the tax and fee". In addition, the Decision on Tax Treatment of the First Inspection Bureau of Foshan Municipal Taxation Bureau of the State Administration of Taxation (Foshan Taxation First Inspection Department [2021] No. 1088) contained the following statement: "Pursuant to Article 32 of the Law on Administration of Taxation Levy, a late fee of five ten thousandths of one per cent of the amount of the tax and fee shall be added on a daily basis for the aforesaid underpaid amount of tax and fee, starting from the date of the late payment of the amount of the tax and until the date on which the amount of the tax and fee is actually paid. According to Article 45 of the Administrative Compulsory Law, the amount of the additional late payment fee shall not exceed the amount of the pecuniary obligation to pay". In practice, some courts also support the view that the tax late payment penalty shall not exceed the principal amount, such as the judicial case mentioned in the opening paragraph; and then, for example, the case of a bankruptcy claim confirmation dispute in Jinan Intermediate People's Court ((2019) LU01MINFENG 4926) and so on.

(iii) Summary: tax late payment shall not exceed the principal amount

Article 32 of the Tax Collection and Management Law provides that "if a taxpayer fails to pay the tax in accordance with the prescribed period, or if a withholding agent fails to release the tax in accordance with the prescribed period, the tax authorities shall, in addition to ordering the payment of the tax within a certain period of time, add a late fee of five ten thousandths of one per cent of the amount of the tax to the amount of the tax in default on a daily basis from the date of the tax in default". This article only provides that the late payment fee can be added, but does not provide whether the late payment fee can exceed the principal amount. Article 45, paragraph 2, of the Administrative Compulsory Law, which is a general law, provides that "the amount of the fine or late payment penalty imposed shall not exceed the amount of the monetary obligation to pay". This paragraph clearly stipulates that the late payment fee shall not exceed the principal amount. At the same time, the State Administration of Taxation (SAT) in the Notice on the Implementation of the Administrative Compulsory Law (Guo Shui Fa [2011] No. 120) also explicitly pointed out that, "regarding the addition of the provision that 'the amount of the late payment penalty shall not exceed the amount of the obligation to make a monetary payment'. Article 45 of the Administrative Compulsory Law stipulates that the amount of fines or late payment fees imposed by ...... shall not exceed the amount of the obligation to pay money. There is no corresponding provision in the Tax Collection and Administration Law." From this, it can be seen that there is no conflict between the Law on Administration of Tax Collection and the Law on Administrative Compulsions on the question of whether the late payment fee can exceed the principal amount. Therefore, the Administrative Compulsory Law can be invoked to apply the late payment fee.

In addition, from the perspective of protecting the legitimate rights and interests of taxpayers, in the current context of the rule of law in taxation, the relationship between safeguarding the interests of national taxation and protecting the legitimate rights and interests of taxpayers should be properly balanced. Late payment fees not exceeding the principal amount can not only prompt the parties concerned to fulfil their obligations to pay taxes, but also avoid imposing an excessive burden of monetary obligations on the parties concerned, forming a balance between tax collection management and the protection of the rights and interests of taxpayers, which is compatible with the goal of realising the rule of law and the modernisation of tax governance.