China’s National Audit Office (CNAO) released its fourth report for 2004 on September 16. The report estimates tax losses at 25 billion yuan (US$3 billion). But, Li Jinhua, auditor-general with the CNAO, revealed in a TV interview that the situation is, in fact, much worse than has been reported in the media.

The report cites four key causes for the deficit: manipulation of taxation schedules and plans; false or erroneous declarations in a bid to avoid or evade tax; irregular practices by local governments; and ineffective tax collection.

Ni Hongri, a researcher at the State Council’s Development Research Center, said:“Although the problems revealed in the report have already existed, this report is the first of its kind. The problems involve mainly the taxation system, budget systems or rules applicable to local governments, and China’s legal environment.”

He Zhenyi, a researcher with the Chinese Academy of Social Sciences, echoed Ni’s comments, highlighting the country’s inappropriate or flawed taxation system as the fundamental cause of its taxation woes.

First, some tax bureaus implement preferential policies, or approve tax cuts, rebates and exemption without prior state permission or approval. Second, corporate tax reports are not scrutinized for omissions or errors. Third, fines are not imposed for late or overdue tax payments. Fourth, because certain preferential tax policies require the approval of several state departments, taxpayers have been known to exploit these cumbersome and bureaucratic procedures.

In the case of corporate taxation, the report reveals that spot checks on enterprises showed that 100 out of 788 enterprises, about 12.69 percent, were guilty of filing erroneous tax reports, or of taking advantage of preferential tax policies for tax evasion purposes. The report also states that the situation is worse in enterprises funded by local governments.

As for local governments acting on their own accord, the report says that among the 35 cities surveyed, local governments of 19 cities intervened in tax collection in one way or another, or exceeded their authority in granting tax cuts and/or exemptions. Forty-six of the 788 enterprises surveyed disclosed that they enjoy preferential tax treatments given by local governments.

Some local governments were also found to have implemented unauthorized tax rebate policies for the purpose of attracting foreign investment, in violation of tax laws and State Council regulations.

He Zhenyi added that the tax reforms implemented in 1994 were not entirely adequate.

For example, levels of taxation or the amount of tax to be collected in any given year are predetermined, the year before, by officials at the State Administration of Taxation and local taxation bureaus. This is typically calculated by referring to the total tax base, and the performance of local economies the previous year. Further, officials are often more concerned with meeting their budget targets than actually achieving accuracy in tax terms.

Ni said:“The statistics (gathered from previous economic performance indicators) should be used for reference only, and not for projecting or setting targets for the following year.”

Responding to the findings in the CNAO’s report, an official with the State Administration of Taxation said that the administration has already begun to study the feasibility of modifying current tax guidelines.