Merging of state and local tax bureaus


Beijing announced on 20 July 2018 the merger of the county/district-level state and local tax bureaus across China. This signalled the final stages of reforms of China’s tax administration to merge the state tax bureaus with the corresponding local tax units into a consolidated local tax authority.

Since 1994, state and local tax bureaus have existed in parallel at the provincial, municipal and county/district levels in places other than Shanghai and Tibet. State tax bureaus were responsible for collecting taxes for the central government such as the consumption tax, as well as certain taxes, such as enterprise income tax (EIT) and value-added tax (VAT), shared between the central and local governments. Local tax bureaus were responsible for the collection of local taxes, such as deed tax and land appreciation tax, as well as some other taxes, such as individual income tax (IIT), shared between the central and local governments.

In March 2018, China started reforms to merge corresponding state and local tax bureaus into a consolidated local tax authority. It announced the provincial-level merger on 15 June 2018, the municipal-level merger on 5 July 2018, and the county/district-level merger on 20 July 2018.

After the merger, the new local tax authority will assume all functions that the corresponding state and local tax bureaus previously performed. The local tax authority will follow directives from both the State Administration of Taxation (SAT) and local governments, with the SAT playing the leading role. Necessary internal arrangements, such as personnel adjustments, will be made to enable the local tax authority to function properly. Also, new procedural guidance will be issued so that taxpayers can fulfil tax formalities with the new local tax authority.


The tax agency reforms could have both positive and negative implications
for taxpayers.

First, they will reduce the compliance burden for taxpayers. Prior to the reforms, a taxpayer would need to deal with two tax bureaus, state and local, even for a single tax issue or for closely related tax issues, such as information update on change of shareholder, tax deregistration, etc. After the merger, the taxpayer will only have one tax authority to deal with and will no longer need to duplicate its tax formalities with two bureaus.

Second, taxpayers could face increased tax audit risks under the supervision of a single bureau. In dealing with two bureaus, taxpayers benefitted from reduced tax audit risks because the two authorities did not always effectively share information or coordinate action. For example, permanent establishment (PE) assessment is a typical area where information sharing was lacking. Frequently, state tax bureaus would initiate PE assessments to collect EIT from non-residents, who had employees providing services in China, while the corresponding local tax bureau would not initiate an audit to collect IIT from the employees, or vice versa. With the merger, tax information should be shared more frequently between different divisions within the same tax authority. If the EIT division initiates a PE assessment to collect EIT, the IIT division is likely to receive this information and then use the PE assessment as a basis to collect IIT.

Finally, taxpayers could expect more sophisticated technical discussions with the local tax authorities. With the merger, the SAT will play a lead role in directing the local tax authorities. The SAT has already established separate Special Commissioners’ Offices (SCO) in Beijing, Chongqing and Guangzhou to supervise local tax authorities in different regions of the country. Each SCO will be responsible for supervising local implementation of SAT tax policies. Generally speaking, the SAT shows more respect to tax law and regulations as opposed to the local tax authorities. Taxpayers may expect the local tax authorities to be more open to discussing technical issues due to the SAT’s greater influence on the latter.

In response to the greater information sharing within the tax authority after the reforms, taxpayers must fully assess their tax risks for all tax arrangements and be well prepared to address potential tax audit risks (if any) before the authority comes knocking on the door.

Given the greater SAT influence on the local tax authorities, taxpayers may consider leveraging the SAT impact to develop more sophisticated technical discussions in cases of disputes with the local tax authorities. Taxpayers should be more confident about challenging tax authority decisions to achieve better tax settlement when a sound legal basis exists, and it is commercially necessary and feasible to do so.

Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Danian Zhang (Shanghai) at