All corporate taxpayers in China are granted a certain tax level. Though it sounds simplistic, the tax level can significantly impact what the company can or can’t do in China, and implies how it is going to be treated by the Chinese authorities. The institution responsible for the grading is the Tax Bureau, but it’s within your, or your local accountant’s power to influence the tax bureau’s decision.
There are five tax levels – A, B, M, C, and D. What does it mean to be graded any of the levels?
Level of trust
The tax level reflects the level of trust your company has earned by the Tax Bureau. The general rule of thumb is the higher the level, the better treatment your company will get.
Level ‘A’ is obviously the highest one, which means you might be entitled to local financial incentives or enjoy preferential policies, such as three booklets of VAT invoices in China, access to senior tax bureau officials for any tax issues, etc. If your company’s tax level is ‘D,’ you should be worried. Low tax level means the tax authorities suspect your business might be involved in some illegal activity; for example, your accountants in China might not properly adhere to the tax filings and payment deadlines, or issue Fapiaos that do not represent your business scope. In addition, companies doing business in China with low tax levels are subject to higher scrutiny and strict monitoring by the tax bureau.
Your corporate credit record
Your tax level is publically visible in the Corporate Credit System, which means your business reputation is in the open. Practically speaking, potential clients or business partners can see your grading and decide whether they wish to work with you or not. Precisely because of this vulnerability, our accountants double-check our clients’ partners’ credentials to provide an extra layer of protection to their operation.
If you have just undergone a company registration in China, or if your local entity did not record any business operations during the previous year, you will probably get the ‘M’ level. You are still expected to submit all your reports to obtain a higher tax level, so don’t neglect to handle them properly, regardless of the amount of business you have had.
Can I upgrade to a higher tax level?
The simple answer is yes. That will require an audit of all of the company’s previous years’ records from when the lower grade was given initially. Your accountant will have to submit all the missing documents and reports for another review by the tax authorities. After they inspect these materials, they will reply with the updated grade (or not).
Two good things this audit will help you achieve:
- Be on speaking terms with the tax bureau. Making an effort to nurture the relationship and comply with their rules is always a good strategy.
- With an upgraded tax level, your China company can enjoy all the aforementioned incentives.
Your next step
As 2022 just started, your accountants are probably already working on your end-of-year report and the yearly financial audit. Take this opportunity to confirm what your tax level is. If it is a low one, check what can be done to upgrade it. A good accountant will not wait for you to ask. Instead, they will inform you the moment a lower level is assigned and develop a plan for changing it.
If you really want to ensure your operations are all compliant with local regulations and tax requirements, you can also consider an external financial or operational audit in China. By any chance, it is recommended to get a second opinion or an objective expert’s look from time to time.