Announcement of the State Administration of Taxation on Matters Concerning Safekeeping Asset Losses Materials for the Enterprise Income Tax Purpose for Future Reference


Date:  2018-08-31    Autor:   SHEN, Michelle

Keyword: Asset losses Reference level

In order to further deepen the reform of"streamlining administration, delegating powers, strengthening regulation and improving services" in the tax system, simplify the tax declaration materials to be submitted by enterprises and relieve tax-related burdens on enterprises, the State Administration of Taxation released the Announcement of the State Administration of Taxation on Matters Concerning Safekeeping Asset Losses Materials for the Enterprise Income Tax Purpose for Future Reference(Announcement of the State Administration of Taxation [2018] No.15) (hereinafter referred to as “the Announcement”) on April 10, 2018. The Announcement clearly states that materials about enterprises' asset losses will no longer be requested and requirements in respect of safekeeping materials on enterprises' asset losses for future reference. This Announcementis applicable to the final settlement and payment of enterprise income tax from the year 2017 and thereafter.

I.The risk changes from the declaration level to the reference level

After carrying out the cancellation of the submission of materials on enterprises' asset losses, although it would reduce the burden on taxpayers on the practice declaration, but it would increase the pressure on taxpayers and relevant financial staff on the risk management. This effect mainly reflects the following aspects:

(a)   Under the declaration level, the tax authorities will help to check whether the materials on asset losses submitted by the enterprises conform to the provisions of the tax law. In case of inconformity or insufficiency, the enterprises will be informed of the request for supplementary provision.

Under the reference level, reference materials and contents shall be collected by the enterprises themselves. Therefore, the preparation ability of financial staff is more required. The risk will be fully borne by the enterprises.

(b)   Because the asset losses events have the characteristics of time points, the original data that needs to be collected in the first place of an event is often harder to retrieve after it has expired. Therefore, it is more stringent for the enterprises to collect and manage first-hand materials on asset losses after the Announcement.

II.The scope of valid evidence to be prepared under the reference system.

Pursuant to the provisions of the Announcement, enterprises shall preserve all materials in relation to asset losses and ensure the truthfulness and legality of such materials. Relevant evidence for asset losses of an enterprise includes legally valid external evidence with legal force and internal evidence for specific matters.

Types  of evidence

Issued  by the party

Materials  requirements

Legally valid external evidence

Judicial organs

Judgments or rulings

Public security organs

Certificates of case filing or conclusion  and replies

Administrative departments for industry and  commerce

Certificates of cancellation, revocation  and business suspension

The other party's enterprise

Announcement of bankruptcy and liquidation,  or documents of debt settlement

Administrative organs

Official documents

Professional technical appraisal  departments

Appraisal reports

Intermediary institutions with statutory  qualifications

Economic appraisal certificates

Arbitration institutions

Arbitral documents

Insurance company

Insurance investigation form, calculation  sheet of declarations settlement, and other insurance documents against  insured assets

Others

Other evidence

Internal evidence for specific matters

Enterprises

Relevant accounting materials and original  vouchers

Enterprises

Statements about the inventory of assets

Enterprises

Business contracts about relevant economic  acts

The internal technical appraisal department  of an enterprise

Appraisal documents or materials

Enterprises

Enterprise's internal approval documents  and a description about relevant circumstances

Enterprises

A description about the determination of  liabilities of people liable for the losses as a result of his poor  management and about the compensations

The legal representative, person-in-charge  and financial controller of the enterprise

The assumption of legal liabilities for the  genuineness of specific matters

III.The type of valid special reports to be prepared under the reference system.

The following provisions of the original Announcement of the State Administration of Taxation on Issuing the Administrative Measures for Deduction of Asset Losses of Enterprises before Income Tax (Announcement ofthe State Administration of Taxation [2011] No.25) related to the requirement of issuing special reports are still valid:

Article 23 The accounts receivable of anenterprise overdue for more than 3 years which have been treated as losses in accounting may be treated as bad debt losses, provided that the circumstances shall be explained and a special report issued.

Article 24 The accounts receivable of an enterprise overdue for more than 1 years which have been treated as losses in accounting and the amount of a single account receivable is no more than 50,000 yuan or 1‰ of the enterprise's annual gross income may be treated as bad debt losses, provided that the circumstances shall be explained and a special report issued.

Article 27 The inventory losses incurred by abandonment, damage or deterioration are the balance of the amount of the taxation cost less the compensation paid by the liable person and shall be recognized on the basis of the following evidentiary materials:

1. Basis for the determination of taxation costof inventory;

2. A description about abandonment, damage,deterioration and residual value of inventory, and the verification and cancellation materials within the enterprise;

3. A description about the compensation paid by the liable person if any; and

4. Professional technical appraisal opinions,or special report issued by intermediary institutions with statutory qualifications if the amount of the losses is relatively large (which meansmore than 10% of the taxation cost for assets of the same type in the enterprise, or the reduction of the taxable income or the increase of the loss by more than 10%, hereinafter the same).

Article 29 The losses of inventory shortage or loss of fixed assets shall be the balance of the book value thereof less the compensation paid by the liable person and shall be recognized on the basis of the following evidentiary materials:

1. Materials about the determination,verification and cancellation of relevant liabilities within the enterprise;

2. Inventory sheets of fixed assets;

3. Relevant materials about taxation basis of fixed assets;

4. A description about the inventory shortage or loss of fixed-assets; and

5. Professional technical appraisal report, or special report issued by intermediary institutions with statutory qualifications if the amount of the losses is relatively large.

IV.Our suggestion

After the declaration system was changed to the system for future reference, it would increase the risks on person-in-charge and financial controller of the enterprise. The real-time materials preparationis a key factor in reducing this risk.

In order to avoid the risk of examination by the tax bureau after the Announcement, we recommend that enterprises find it difficult to collect full or clear enough evidence of asset losses, you shall promptly seek the advice of external financial advisers. The matter that needs to issue appraisal report of asset losses, enterprises shall be sure to issue aspecial report to reduce the risk afterwards.


If you have further interest in of the complete (8 newsletter issue, you can download the whole newsletter bulletin via the “PDF icon” at the right hand top/ bottom side(PDF