Editor's Note: Recently, the State Administration for Market Supervision and Administration (SAMSA) issued the Implementation Measures for the Regulations on Fair Competition Review (hereinafter referred to as the Implementation Measures) to further refine the Regulations on Fair Competition Review (hereinafter referred to as the Regulations), which came into effect on August 1 last year. Under the framework of the Regulations, the Implementation Measures have refined and improved the general requirements for fair competition review, departmental responsibilities, review standards, review mechanism, review procedures and supervision and safeguard measures. In terms of tax-related aspects, business models relying on fiscal and tax incentives are common in industries such as renewable resources and flexible labor, and after the Implementing Measures have further clarified the requirements for fair competition review, the related tax-related risks need to be emphasized. This article analyzes the three major tax-related risks based on the Implementing Measures' refinement of the scope of fair competition review and the review criteria for readers' reference.

I. Clarifying the scope: Administrative agreements and memorandums involving operators' economic activities are subject to fair competition review

Article 2 of the Implementation Measures specifies the scope of fair competition review as the policy measures drafted by the drafting unit involving the economic activities of the operator, which mainly includes two categories: first, laws, administrative regulations, local laws and regulations, rules and normative documents, and second, specific policies and measures, such as policy documents, administrative agreements and memoranda signed with the operator, etc. In practice, investment enterprises usually agree on fiscal and tax incentives through investment agreements or the formation of meeting agreements.

In practice, investment enterprises usually agree on fiscal and tax incentives through investment agreements with local governments or the formation of minutes of meetings, etc. According to the scope of review specified in the Implementation Measures, measures such as tax incentives and fiscal subsidies involving the economic activities of operators are subject to fair competition review. We suggest that investment enterprises and local governments should pay attention to the legitimacy of the relevant fiscal and tax incentives when they draw up investment cooperation agreements or minutes of meetings, and determine whether there are any fiscal and tax incentives granted to specific operators without the basis of laws and administrative regulations or without the approval of the State Council, so as to guard against the risk of non-compliance with the fiscal and tax incentives.

II. Clarify the review standard of tax incentives, and face strict supervision on the application of authorized levy in violation of the law.

Article 10 of the Regulations stipulates that the policy measures drafted by the drafting unit shall not grant tax preferential policies to specific operators without the basis of laws and administrative regulations or without the approval of the State Council. The Implementation Measures further clarify the review criteria for preferential tax policies, listing that unauthorized drafting of policies and measures shall not include reducing or exempting specific operators from the obligation to pay taxes, or supporting specific operators to pay fewer or no taxes by illegally converting the form of organization of the operator or applying approved levies to specific industrial parks.

The Law on Legislation and the Law on Administration of Tax Collection stipulate that tax reduction, exemption and refund shall be based on the law. With the cleaning up of illegal tax preferences in the past, the preferential policies such as tax exemption, tax refund and other direct tax incentives have been tightened up; however, some local governments illegally allow enterprises to apply the approved levy, and it is not uncommon to see enterprises evading taxes by converting the form of organization and scope of business in order to apply the policies of the approved levy and so on, and to make use of the “approved levy” and other policies to form the “approved levy”. The use of authorized levy and other policies to form “tax pits” has become the focus of audit and tax supervision in recent years. For example, in October 2024, the State Administration of Taxation Honghe Hani and Yi Autonomous Prefecture Taxation Bureau issued a Notice of Tax Matters, which showed that a company had falsely changed its business scope from “equity investment, investment consulting” to “enterprise management consulting, cultural and cultural consulting” in the context of its actual business of engaging in equity investment. “Enterprise Management Consulting, Cultural Creative Planning Consulting Services”, and applied for approval of levy on the grounds that the company's accounts were not sound and the costs and expenses could not be properly accounted for, thus making false tax declaration and resulting in underpayment of EIT of RMB 267,572,039.94.

As a supplementary method of checking accounts for collection, approved collection has a clear scope of application. Article 35 of the Tax Collection and Management Law stipulates that if a taxpayer fails to set up account books, destroys the account books without authorization or refuses to provide tax information, or sets up account books but the accounts are confusing and difficult to be checked, or the basis for calculating tax is obviously low without any justifiable reasons, the tax authorities have the right to adopt reasonable methods to approve the amount of tax payable by the taxpayer. The Implementation Measures' refinement of the review criteria for tax incentives responds to the phenomenon of the formation of “tax depressions” by the illegal implementation of policies such as the approved levy that are common in practice, and the disguised application of the approved levy “tax-saving arrangements”, such as relocation, change of organizational form, and replacement of the scope of business, etc., have faced great difficulties in adjusting and making up for their tax liabilities. The previous “tax-saving arrangements” such as relocation, change of organization form, change of business scope and other disguised applications of approved levy are facing great risks of adjustment and back tax. For enterprises that intend to apply the approved levy policy, they should accurately judge whether they are in line with the scope of application of the approved levy and guard against the risk of adjusting back taxes.

III. Clear financial incentives or subsidies policy review criteria, the first levy and then return, that is, the levy is refunded, and other financial returns to tighten the regulation

Article 10 of the Regulations stipulates that policy measures drafted by the drafting unit, without the basis of laws and administrative regulations or without the approval of the State Council, shall not be given to specific operators selective, differentiated financial incentives or subsidies. Article 19 of the Implementation Measures specifies what is meant by “selective and differentiated fiscal incentives or subsidies”, for example, without authorization, it is not permitted to illegally take the form of first levy and then return, or levy and then refund, etc., to a specific operator to make a return.

With the recent years, many departments carry out the clean-up action of illegal tax rebate, the common practice of “linked with tax revenue” financial rebate, incentive and subsidy policy has a greater risk of application, the “Implementation Measures” to further clarify the financial incentives or subsidies of the review criteria, clearly put forward the unauthorized through the “levy before return, levy refund, etc.”. The Implementation Measures further clarify the review criteria for financial incentives or subsidies, and clearly state that unauthorized financial rebates through the “first levy and then return, i.e., levy and then refund, etc.” are prohibited, and that with the implementation of the Fair Competition Review System, the financial rebate policy of “linking to tax revenues” will be further tightened, and the enterprises may be faced with the risk of recovering the financial rebates.

In addition, enterprises applying financial rebates to conduct business should also pay attention to the risk of false opening. In the past investment promotion practice and constitute the case of false opening, through the financial rebate to carry out business for renewable resources, flexible labor and other sources of invoices shortage of industry enterprises, financial rebate is one of the ways to suppress the tax burden of these enterprises, to solve the shortage of inputs. For this business model, in practice, it is easy to raise the suspicion of using financial rebate to make profit by false opening, one is based on the special nature of the industry and practice, the rationality of the business model of the enterprises in the aforementioned industries and the authenticity of the business is easy to be questioned, such as the trade chain is too long, not actually involved in the transportation and so on, secondly, the operation of the irregularities in the process of carrying out the business of such enterprises is easy to lead to the suspicion of false opening, and thirdly, in the current strict investigation of irregular tax rebate, fair competition review system, and so on. Thirdly, under the current background of strict investigation of tax rebates and further implementation and promotion of the fair competition review system, the business carried out by applying financial rebates has attracted much attention, and the reasonableness and authenticity of its business is facing a greater test.

In our opinion, enjoying fiscal rebate does not mean that there must be false opening, between fiscal rebate and false opening, on the surface, it is the enterprise based on the invoice issuance to confirm the income, payment of taxes and then obtain fiscal rebate, but the essence behind the invoice issuance legality or not is still to judge whether the business is authentic or not, and the judgment on the authenticity of the business needs to be returned to the industry's particularities and operational practices, and to understand the reasonableness and necessity of the setting up of the business chain. The judgment of business authenticity needs to return to the industry specificity and operation practice to understand the rationality and necessity of business chain setting. If the enterprise has real business, business process compliance, then its invoicing behavior should not be recognized false opening, then talk about the legitimacy of the financial return policy, if the financial return policy in violation of laws and regulations, the local government requires the enterprise to pay back a certain legal basis; if the enterprise and the local government to enter into a cooperation agreement or the government minutes, documents and other provisions, the enterprise should obtain the agreed financial return. Financial return, the local government has no right to require enterprises to return.

Summary

The Implementation Measures will come into force on April 20 this year, and the implementation of the fair competition review system will further promote the standardization of incremental policies and measures and the clean-up of the stock of policies and measures. For enterprises to apply local fiscal and tax incentives, it is necessary to review the cooperation agreement signed with the local government, focusing on the verification of the legitimacy of fiscal and tax incentives, focusing on the source of funds and conditions of the award, analyzing and evaluating the feasibility of fiscal and tax incentives and the risk of redemption; for enterprises that have already applied fiscal and tax incentives, they should be regularly “looking back”, reviewing the signed investment promotion agreement, and reviewing the implementation of the Fair Competition Review System. For enterprises that have applied preferential fiscal and tax policies, they should regularly “look back” and review the legitimacy of signed investment promotion agreements, pay attention to the latest regulatory developments, and adjust the business model in a timely manner.