Editor's Note: In recent years, tax-related disputes have arisen frequently in enterprise bankruptcy cases, and one of the disputes is whether the education surcharge and local education surcharge declared by the tax authorities can be recognized as tax claims. The tax authorities claimed that the education fee surcharge and local education surcharge should be recognized as tax claims, while the bankruptcy administrators believed that they were ordinary claims. In this regard, this paper takes the typical judicial case as the starting point and argues that the determination of the claim of education fee surcharge and local education surcharge should follow the principle of distinction between tax and fee, and the State Administration of Taxation Announcement No. 48 of 2019 cannot be used as the basis for the characterization of the claim, and ultimately comes to the conclusion that the education fee surcharge and local education surcharge do not belong to the tax claim, which is aimed at providing a clear idea and a useful reference to the resolution of the problem of the determination of the nature of the claim. The purpose is to provide clear ideas and useful reference for the resolution of the nature of the claim.

01 Chaoyang District Tax Bureau v. A company in bankruptcy claim confirmation dispute

(i) Basic facts of the case

On January 25, 2022, the Intermediate People's Court of Changchun City, Jilin Province ruled to accept the application for bankruptcy liquidation of a company. On June 7, 2022, the Chaoyang District Tax Bureau declared its claims to the administrator, with a total claim amount of 6.9 million yuan, of which 3.53 million yuan was the principal amount (including 30,000 yuan of surcharge on education fees and surcharge on local education), and 3.37 million yuan was the late payment fee. The administrator held a creditors' meeting on July 12, 2022, and initially confirmed the tax claim of Chaoyang District Tax Bureau at RMB 3.5 million and the ordinary claim at RMB 3.4 million, i.e., RMB 30,000 of education fee surcharges and local education surcharges were confirmed as ordinary claims.

On July 13, 2022, the Chaoyang District Tax Bureau filed a written objection to the administrator requesting that the education fee surcharge and local education surcharge be recognized as tax claims, which was not supported by the administrator. The Chaoyang District Tax Bureau objected and filed a lawsuit with the Changchun Intermediate Court, requesting to confirm that the education fee surcharge and local education surcharge of RMB30,000 constituted a tax claim.2022 In September 2022, the court ruled to reject the Chaoyang District Tax Bureau's lawsuit, and an enterprise won the lawsuit.

(ii) Views of the parties

The dispute in this case is whether the education surcharge and local education surcharge declared by the tax authorities in the bankruptcy proceedings can be recognized as tax claims.

The Chaoyang District Tax Bureau is of the view that the education fee surcharge and local education surcharge possess the general characteristics of compulsory, gratuitous and fixed nature of tax, and are tax revenues, and that the nature of the claims of the education fee surcharge and local education surcharge should be recognized as tax claims in accordance with Article 4 of the Announcement on Several Matters Concerning Tax Levy and Administration (Announcement of the State Administration of Taxation No. 48 of 2019).

A company argued that the principle of statutory taxation was a basic principle of the tax legal system, and that education surcharges and local education surcharges did not belong to the taxes stipulated in the law, and that they were not tax revenues but revenues of the national governmental fund. Article 113(1)(2) of the Enterprise Bankruptcy Law stipulates that the preferred claims are "taxes owed by the bankrupt", and the education surcharge and local education surcharge are not "taxes" but "fees", and the nature of their claims should be "taxes" and "fees". "The nature of their claims should be ordinary claims.

The Changchun Intermediate People's Court held that according to the Legislative Law, the establishment and collection of taxes in China are subject to laws and regulations, and that the Chaoyang District Taxation Bureau's claim that the education surcharge and local education surcharge constituted a tax claim was based on the State Administration of Taxation's Announcement No. 48 of 2019, but the Announcement belonged to the departmental regulations and did not explicitly state that the education surcharge and the local education surcharge belonged to a tax claim. Therefore, the education fee surcharges and local education surcharges should not be recognized as tax claims, and the judgment dismissed the Chaoyang District Tax Bureau's claim.

02 The determination of claims for education surcharges and local education surcharges should follow the principle of differentiation between taxes and fees

Although education surcharges and local education surcharges are levied at the same time as value-added tax and consumption tax, their legal nature is fundamentally different from tax claims. It should be clear that education surcharges and local education surcharges are non-tax revenues in nature.

According to Article 8 of the Legislative Law, "only laws may be enacted on the following matters: ...... (f) the basic system of taxation, such as the establishment of tax types, the determination of tax rates and the administration of tax collection; ...... "Article 3 of the Tax Collection and Administration Law provides that "the introduction and suspension of taxes, as well as tax reductions, exemptions, refunds, and reimbursements, shall be carried out in accordance with the provisions of the law; and where the State Council is authorized by law to make such provisions, they shall be carried out in accordance with the provisions of the administrative regulations enacted by the State Council. No organ, unit or individual may, in violation of the provisions of laws and administrative regulations, make unauthorized decisions on the introduction or suspension of taxes, or on tax reductions, exemptions, refunds or compensatory taxes, or any other decisions that contravene tax laws and administrative regulations", so that the establishment and collection of taxes are matters reserved by law, and can only be enacted by the National People's Congress and its Standing Committee. Unless expressly authorized by law, administrative organs may not prescribe tax matters reserved by law. There are a total of 18 taxes in force in China, and education surcharges and local education surcharges are not among them.

And according to the Measures for the Administration of Government Non-Tax Revenue (Cai Shui [2016] No. 33), Article 3, Paragraph 1 provides that "non-tax revenue refers to the various revenues other than taxes, which are obtained by state organs at all levels, institutions, social groups acting on behalf of the government, and other organizations in accordance with the law by using the power of the state, the credibility of the government, and the interests and rights of owners of state-owned resources (assets). Specifically, it includes: (b) governmental fund revenue; ......", according to which it is known that governmental fund revenue is non-tax revenue. The List of National Governmental Funds Catalog published by the Ministry of Finance in 2017 explicitly lists education fee surcharge and local education fee surcharge as governmental funds. Therefore, education fee surcharges and local education surcharges are non-tax revenues in terms of their legal nature, which is fundamentally different from tax revenues.

The specificity of the use of funds for education surcharges and local education surcharges further confirms their non-tax revenue attributes. Non-tax revenues are positioned as a supplement to taxes to meet the government's need to provide specific public services, and are decentralized and earmarked for specific purposes. According to the Education Law and the Interim Provisions on the Collection of Educational Surcharges, the use of educational surcharges is mainly for the implementation of compulsory education, and the use of local educational surcharges is to support the development of local education, and the two surcharges are special governmental funds set up to support the cause of education. In contrast, the purposes of the taxes are general in nature and do not directly correspond to specific public services.

Article 113 of the Enterprise Bankruptcy Law stipulates the internal order of liquidation of bankruptcy claims, in which tax claims are second in line and have priority over the liquidation of ordinary claims. Since education surcharges and local education surcharges are not tax revenues, they naturally should not be included in the scope of tax claims in bankruptcy proceedings. There is an essential difference between fees and taxes, which should strictly follow the principle of distinction between taxes and fees, and recognize education fee surcharges and local education surcharges as ordinary claims.

03 Announcement of the General Administration of Taxation does not constitute a basis for the characterization of claims for education surcharges and local education surcharges

In this case, the legal basis for the tax authorities to assert that education surcharges and local education surcharges should be recognized as tax claims is the Announcement on Several Matters Concerning Tax Levy and Administration (State Administration of Taxation Announcement No. 48 of 2019). Article 4, paragraph 1, subparagraph 1 of the Announcement provides that "the tax authorities shall declare to the administrator the taxes (including education fee surcharges and local education surcharges, hereinafter referred to as the same), late payment fees and penalties owed by the enterprise within the time limit for the declaration of claims as announced by the people's court. Interest arising from special tax adjustments shall also be declared", on the basis of which the tax authorities considered that the taxes owed by the enterprise included education surcharges and local education surcharges.

Paragraph 3 of Article 4 of the Announcement provides that "the taxes, late fees and interest arising from special tax adjustments owed by an enterprise shall be declared by the tax authorities in accordance with the relevant provisions of the Enterprise Bankruptcy Law, of which the late fees and interest arising from special tax adjustments shall be declared in accordance with the ordinary bankruptcy claims", and the tax authorities considered that the provisions of this paragraph listed the contents of the ordinary claims, which should be given priority. The tax authorities considered that this paragraph listed the contents of ordinary claims, and by way of reverse exclusion, reaffirmed and confirmed that the education surcharges and local education surcharges were declared as tax claims and should be given priority in compensation.

In the author's opinion, this way of logical reasoning cannot be established. First of all, the announcement only stipulates the scope of claims that should be declared by the tax authorities within the claim declaration period announced by the People's Court, and does not judge the nature of education surcharges and local education surcharges, nor does it explicitly stipulate that education surcharges and local education surcharges belong to the taxes owed by enterprises, and this enumeration is only a provision at the operational level. Secondly, the provision only points out that late payment and special adjustment interest should be declared in accordance with ordinary claims, but it does not mean that other claims not listed are automatically categorized as tax claims. Therefore, it is not possible to make a simple inverse inference that the claims of education surcharges and local education surcharges are tax claims if they are not listed among the ordinary claims.

In addition, the nature of the State Administration of Taxation Announcement No. 48 of 2019 is a departmental normative document, not a law or administrative regulation, and according to the principle of statutory taxation and the relevant provisions of the Legislation Law and the Law on the Administration of Taxation, there should be clear legal provisions for the recognition of tax claims, and the Announcement could not break through the definitions of tax in the law and the administrative regulations and could not be used as a legal basis for the recognition of tax claims. Therefore, in the absence of clear legal provisions, education surcharges and local education surcharges cannot be recognized as tax claims.

04 Conclusion

Education surcharges and local education surcharges are non-tax revenues in nature, and should not be recognized as tax claims in insolvency proceedings, as this would be contrary to the principle of statutory taxation. In addition, after an enterprise enters into bankruptcy proceedings, correctly determining the liquidation priority of various types of claims involves the immediate interests of creditors, and plays a crucial role in realizing the legislative purpose of "fair liquidation of claims and debts". Any expansion of the content of prior-ranking claims should have a clear legal basis, otherwise the interests of creditors in the latter order will be jeopardized. Therefore, the definition of "taxes owed by the bankrupt" under the Enterprise Bankruptcy Law should be strictly in accordance with the provisions of the law and should not be interpreted arbitrarily as an expansion of the definition of "taxes", as it takes precedence over ordinary claims in terms of the realization of claims.

Local judicial practice generally recognizes education surcharges and local education surcharges owed before bankruptcy acceptance as ordinary claims in bankruptcy claims. For example, the Zhejiang Provincial Higher People's Court and the Zhejiang Provincial Taxation Bureau jointly issued the Minutes on Optimizing the Handling of Tax-Related Matters in Enterprise Bankruptcy (ZJGF [2023] No. 18), which stipulates that "[f]or the late fees, interest and other non-tax revenues arising from the non-payment of taxes and social insurance premiums levied by the tax authorities, the payment will be settled in accordance with the ordinary claims ". In reviewing the claims declared by the tax authorities, the bankruptcy administrator should prudently examine the legal nature of different types of claims to avoid undue infringement of the interests of ordinary creditors, reduce disputes arising from the declaration of claims, promote the smooth progress of the bankruptcy proceedings, and effectively safeguard the legitimate rights and interests of all parties.