CHINA’S EVOLVING TAX DISPUTE FRAMEWORK

An important survey of taxation in China:

Audit, Assert, Appeal: China’s Evolving Tax Dispute Framework

By Abe Zhao

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An Increasingly Active Tax Audit Landscape

Tax enforcement in China is evolving rapidly, and multinational companies with operations in the country must navigate an environment that blends traditional local discretion with an improving legal framework. While audits in China continue involving case-by-case negotiation with local officials, tax authorities are increasingly guided by a more systematic, data-driven approach.

The result is an enforcement model that remains relationship-sensitive at the execution level but is also becoming more structured in how risks are identified and pursued.

At the heart of this shift is the growing use of digital cross-referencing tools under Phase IV of China’s Golden Tax System. This national VAT administration platform integrates invoice data, customs records, and corporate filings to identify anomalies or patterns that suggest audit targets. Although this process involves some automation, it still requires human intervention to verify and interpret red flags. It does not yet rise to the level of artificial intelligence, but it has enabled the tax authorities to initiate a broader range of audits at a higher frequency than in the past.

One notable feature of the current enforcement environment is the growing use of informal audit procedures. Rather than issuing a standard audit notice, local tax officials often begin with a “tax risk reminder letter” or a “tax self-inspection notice,” which lists potential risk areas and requests the taxpayer to conduct a self-review. The taxpayer is typically asked to respond within a specified timeline with a written explanation and any proposed rectifications. This allows the authorities to trigger and advance a de facto audit without initiating formal procedures that would require internal authorization within the tax bureau. This model has become more common with the rise of system-generated alerts and allows audits to proceed more flexibly while still pressuring the taxpayer to respond substantively.

At the same time, China’s dispute resolution framework is becoming more visible and more frequently accessed by taxpayers. Administrative appeal (also known as administrative reconsideration), a nonjudicial process managed by the tax authority’s own internal review team, is now a more common taxpayer response to audit adjustments, such as when a taxpayer believes procedural rules were not followed or tax positions were assessed too narrowly. Although the underlying legal basis for appeals has not changed, a key reform proposed in the draft Tax Collection and Administration Law (TCAL) could allow a taxpayer to pursue an administrative appeal without the prepayment of the disputed tax amount. Currently, the taxpayer must settle the disputed tax amount or provide a financial guarantee before initiating the administrative appeal process.

Meanwhile, tax litigation is more frequently a strategic option. Although Chinese courts have not routinely handed out judicial rulings that formally overturn tax authority decisions, there has been a noticeable increase in cases in which court proceedings have prompted tax bureaus to reevaluate their position. In those situations, the tax bureau may revise its assessment and negotiate a settlement more favorable to the taxpayer in exchange for a withdrawal of the taxpayer’s administrative lawsuit. Courts are playing a more active role in influencing outcomes, and their involvement often carries weight that leads to a more balanced position for the tax authorities, typically to the benefit of taxpayers.

This evolving combination of audit technology, informal enforcement tactics, and gradually enhanced dispute resolution processes reflects a new era in China’s tax administration, one in which multinationals must combine practical local knowledge with a firm understanding of legal and procedural protections.

Legislative Reform

Much of the evolution in China’s tax enforcement posture is tied to ongoing legislative reform, especially proposed amendments to the TCAL, which was released in draft form for public comment in March 2025. The draft law outlines significant changes to the investigatory powers of the tax authorities, as well as adjustments to how taxpayers can challenge unfavorable decisions.

Expanded Enforcement Powers

The TCAL draft confirms and expands many of the enforcement practices seen in recent audit cases. The tax authorities would gain:

· explicit authority to access third-party data, including upstream vendors and downstream customers in the taxpayer’s supply chain;

· legal backing, giving auditors the right to inspect premises and collect materials in real time when tax evasion or material noncompliance is suspected; and

· support for interdepartmental coordination, allowing data to be shared and jointly analyzed across customs, foreign exchange, and local business registration branches, particularly in cross-border transaction cases.

Many of these powers are already being used in tax investigations. The draft TCAL seeks to codify them into law and remove ambiguity about their scope and legitimacy. For taxpayers, this suggests that enhanced scrutiny will continue and that data consistency will become more important in audit defense.

More Frequent and Accessible Administrative Reconsideration

Although the procedural system for administrative appeals has not fundamentally changed, its practical use is becoming more widespread. Many foreign-invested enterprises are now filing reconsideration petitions when faced with adjustments they believe to be substantively flawed. This process allows the taxpayer to request a second-level review by a separate and more senior internal unit of the tax authority. It has become a more accepted tool for managing disputes before escalating to litigation.

Importantly, the draft TCAL includes a proposed amendment that would allow taxpayers to initiate an administrative appeal before paying the disputed tax amount or, alternatively, by providing a security guarantee in advance. This represents a potentially significant improvement in pursuing administrative remedies.

Under current practice, taxpayers facing large tax assessments often struggle to raise sufficient funds to immediately pay the disputed amount or to provide a guarantee acceptable to the authorities. If the payment or guarantee cannot be made within 15 days of notification, the taxpayer may lose the right to file an administrative appeal, an essential prerequisite for starting administrative litigation in tax disputes. Moreover, the requirement to prepay the tax has raised concerns about the neutrality of the appeal process. Although the appeals authority is organizationally separate from the auditing unit, taxpayers worry that prior collection of the tax could influence the appeal outcome, potentially biasing the authority toward upholding the original assessment to preserve the collected revenue.

If enacted, the proposed amendment would remove a key barrier to pursuing appeals and is likely to encourage more taxpayers to use the process. Given that appeals are a mandatory step before initiating litigation, the reform could also lead to an increase in tax-related court cases, reinforcing the role of judicial review in China’s evolving tax enforcement environment.

Overall, the shift toward greater procedural clarity and enhanced rights, combined with the tax authorities’ increasing reliance on system-identified audit targets, suggests that taxpayers should now approach audits not only as a local negotiation but also as an established procedural process. The next section examines the specific types of tax issues that are drawing attention in this environment.

Key Audit Triggers in 2024-2025

Foreign-invested enterprises operating in China face a rising number of tax examinations in a diverse range of issue areas. Although each audit is handled on a case-by-case basis, the overall pattern of audit focus reflects a consistent emphasis on verifying the authenticity, substance, and business purpose of cross-border and intercompany transactions.

The subsections below outline the audit themes most relevant to multinational companies with foreign-invested enterprises. These are drawn from recent practitioner experience and local-level case disclosures and are presented not as comprehensive technical analyses but as practical indicators of current enforcement priorities.

Deductibility of Service Fees: Increased Scrutiny

A recurring area of tax audit focus involves the deductibility of service fees, for both related-party and third-party arrangements. A common misconception among taxpayers is that having a contract and a VAT invoice is sufficient to support a deduction. Although those documents are necessary, they are no longer enough in practice. Tax authorities increasingly require more detailed, transaction-specific evidence to confirm that services were actually rendered and that they provided a direct benefit to the Chinese entity.

Auditors now expect to see robust documentation, such as instructions issued to the service provider, the deliverables produced, internal reviews or approvals confirming acceptance, and related communications (such as emails, meeting minutes, or reports), which reflect the actual provision of services. These records help substantiate not only the occurrence of the service but also its relevance and benefit to the business.

Chinese authorities also closely examine payment records. If large balances of service-related accounts payable remain unpaid for extended periods of time, auditors may challenge the validity of prior tax deductions. Even if supporting documents exist, the absence of actual payment and the lack of a clear plan to settle the balance can lead tax officials to challenge previously deducted amounts, arguing that the expense was not truly incurred.

Outbound Service Payments: Expanded Risk Areas

When services are received from overseas vendors, whether affiliated or third party, Chinese subsidiaries often face heightened scrutiny during tax audits. The concerns discussed in the previous section regarding authenticity, benefit, documentation, and payment records all apply here and often form the first layer of review.

In the context of outbound service payments, a recurring audit issue is the recharacterization of service fees as “generalized royalties.” This shift has significant tax implications: Royalties are subject to a 10 percent withholding tax under Chinese domestic law, whereas service fees may not trigger withholding if properly documented and sourced outside China. In several recent audits, tax authorities have taken the position that certain technical, design, or know-how-related services were more appropriately classified as royalties, particularly when intellectual property was involved. Sometimes the services were recast as rent, which also attracts withholding tax.

Even if the services are accepted as genuine and not recast, tax authorities will also examine whether the activities of the overseas provider give rise to a permanent establishment in China, particularly when services are performed onshore. In parallel, they will assess whether the Chinese taxpayer correctly withheld VAT on the outbound payment. If a VAT exemption is claimed on the grounds that the place of consumption is outside China, the burden rests with the taxpayer to substantiate that position with appropriate supporting evidence.

Transfer Pricing: Persistent Priority

Transfer pricing remains a key enforcement priority, extending to cross-border and domestic related-party transactions. Domestically, auditors focus on cases involving income tax rate differentials (for example, transactions between one foreign-invested enterprise enjoying a preferential rate and another taxed at the statutory 25 percent rate). Even when both entities face the same income tax rate, audits could be triggered when one party has accumulated substantial net operating losses, effectively facing a zero-tax burden. In both situations, tax officials examine whether profits have been shifted to the lower-taxed or loss-making entity in a non-arm’s-length way.

In the cross-border context, auditor scrutiny is given to royalty payments for technology or trademarks, especially when the recipient is based in a low-tax jurisdiction. Service fees paid to offshore affiliates also draw attention when the nature of the services is unclear or documentation is weak. Authorities often benchmark related-party export margins against domestic third-party sales, and significant pricing gaps may be viewed as indicative of base erosion.

Transfer pricing audits are especially active when Chinese subsidiaries contribute materially to value creation. Distributors involved in building brand awareness in the Chinese market or entities engaged in substantive research and development activities may be seen as making material contributions to the development of marketing or technical intangibles. Tax authorities often expect these nonroutine contributions to be reflected in the pricing outcome. Likewise, contract manufacturers reporting losses caused by underused capacity may be challenged because authorities generally expect limited-risk manufacturers to be insulated from market demand fluctuations.

Beneficial Ownership

When Chinese subsidiaries remit dividends, royalties, or interest to offshore entities, they often seek to apply reduced withholding tax rates available under China’s bilateral tax treaties. However, those treaty claims are closely scrutinized under the Chinese beneficial ownership requirements. Tax authorities do not rely solely on legal title to the income but instead apply a substance-over-form approach when evaluating whether the offshore recipient qualifies as the beneficial owner.

The beneficial ownership assessment is based on a multifactor test that considers actual control over the income, economic substance, and degree of independence from other entities. In practice, tax auditors look at whether the recipient conducts substantive business operations of its own, whether it plays an intermediary or passthrough role for another party, and whether there are contractual or financial arrangements that require the income to be forwarded to a third entity.

These factors are evaluated holistically to determine whether the recipient has the right to retain and enjoy the income, both legally and economically.

If the tax auditor concludes that the foreign recipient lacks beneficial ownership, it will deny the treaty benefit and apply withholding tax at the full domestic rate. While challenges related to beneficial ownership most commonly arise in the context of dividend distributions, recent cases have also identified outbound payments of interest or royalties.

R&D Deductions and High-Tech Tax Rate

Chinese subsidiaries that apply for R&D super deductions or claim the high and new technology enterprise preferential tax rate face heightened scrutiny from tax authorities. Officials have made it clear that these incentives are intended only for companies engaging in substantial innovation activities, with a clear emphasis on whether the underlying research and IP development genuinely occur within China.

A fundamental requirement for qualifying as a high and new technology enterprise is the incurrence of a sufficient level of eligible R&D expenses. Although the criteria differ slightly between the super deduction and high and new technology enterprise regimes, the principle is the same: Only bona fide, innovation-driven R&D that involves technological risks and is performed in China qualifies for favorable treatment. Tax authorities are increasingly focused not just on the amount spent but on the nature and purpose of the work, including whether it contributes to genuine innovation or merely reflects incremental product improvements.

A recent case illustrates this distinction in practice. A company sought the R&D super deduction for developing a raisin-cleaning machine to reduce manual labor and improve efficiency.¹ Although the equipment introduced structural enhancements by integrating additional spray nozzles into a traditional water-flow system, the authorities concluded that the core function of the machine remained unchanged. Because the project was viewed as a straightforward optimization of existing technology without material technical uncertainty at the beginning of the development, the claimed expenses were ultimately denied R&D incentive treatment.

VAT Input Credit Risk: Vendor Liability

In China, a purchasing taxpayer’s ability to claim input VAT credits on domestic transactions depends not only on holding a VAT invoice issued by the supplier but also on whether the invoice reflects a genuine transaction and was issued in accordance with procedural rules. Tax auditors may determine that an invoice was falsely issued if, for example, the supplier did not own the goods and acted merely as an intermediary to generate invoices for a tax evasion arrangement that it facilitates. In these cases, even if the taxpayer made the purchase in good faith, paid the supplier, and received the goods without any knowledge of the wrongdoing by the supplier, the VAT credit may still be denied. This typically follows a separate audit of the supplier, during which local tax auditors conclude that false invoicing occurred and then notify the taxpayer’s local tax bureau. That bureau will usually initiate its own audit of the purchaser on the related input VAT credits.

Even when the taxpayer can provide payment records, warehouse receipts, and logistics documentation confirming delivery, tax auditors may still reject the VAT input credit based on defects in the supplier’s invoicing conduct. These cases highlight that compliance risks can arise not only from the taxpayer’s own actions but also from weaknesses in a supplier’s tax behavior. As a result, it is increasingly important for foreign-invested enterprises to vet their suppliers and maintain thorough procurement records that establish commercial substance. Securing a valid VAT invoice is no longer sufficient; taxpayers must also be prepared to defend the authenticity of the entire transaction during an audit, especially when challenged based on findings originating from supplier-side VAT audits.

Individual Income Tax Withholding: Corporate Obligations

Tax audits are increasingly examining employer-side compliance with employees’ individual income tax obligations, especially in multinational companies with complex compensation structures. Arrangements involving equity incentives, such as restricted stock units or stock options, are a common area of review, as are expatriate benefits including housing allowances, tax equalization, and relocation support. In many multinational groups, employees work under split payroll or secondment models, where the legal employer may be offshore while day-to-day supervision is exercised by the Chinese subsidiary. In such cases, tax auditors assess whether the Chinese entity should be treated as the deemed employer and therefore responsible for individual income tax withholding.

A related area of audit focus involves the tax treatment of noncash benefits and employee welfare programs. Chinese companies frequently provide low-value promotional items to customers or issue prepaid cards to employees as part of internal morale-boosting programs. Although these practices are common and often modest in value, tax auditors generally treat them as taxable income in the hands of the individual recipients. As such, the distributing company is required to withhold and remit the corresponding individual income tax. Failure to do so, even in seemingly minor cases, can result in penalties or retroactive tax adjustments during an audit.

In these reviews, tax auditors assess whether the correct amount of individual income tax was withheld, fringe benefits and equity-based compensation were properly classified, and expatriate arrangements are structured in a way that triggers domestic withholding obligations. To manage these risks, coordination between a company’s human resources department and tax teams is critical. Tax functions should be kept fully informed of any human resources department-led compensation or benefit programs that may have implications allowing for timely assessment, appropriate withholding, and accurate reporting in line with audit expectations.

Preparing for Audit and Asserting Taxpayer Rights

As China’s tax audit environment becomes more structured and data-informed, multinational enterprises are encouraged to shift their approach from passive compliance to proactive audit readiness. Success in managing audits increasingly depends not on informal relationships but on well-grounded legal positions, detailed factual support, and a clear understanding of taxpayer rights.

Pre-Audit Readiness

Given the growing reliance on digital cross-referencing tools within Phase IV of China’s Golden Tax System, many audits are now triggered by system-generated alerts or perceived inconsistencies in filings. As a result, taxpayers can no longer rely on the assumption that audits will be limited to exceptional or high-risk situations. Instead, regular self-initiated reviews should become part of standard tax governance procedures.

Key steps for pre-audit readiness include:

· review of service contracts and intercompany agreements, ensuring that they reflect actual business arrangements and contain sufficient detail to support substance-based evaluations;

· confirmation that supporting documentation is in place, including deliverables, correspondence, project records, benefit analyses, and meeting minutes for service payments and headquarters cost allocations;

· verification of internal consistency across filings, such as matching contract terms with customs declarations, commercial and VAT invoices, and financial statements; and

· early identification of red-flag transactions, such as unusually large consulting fees, long-outstanding payables, or payments to low-substance affiliates.

In the current environment, well-maintained documentation is not merely defensive, it is foundational. Tax authorities are increasingly accustomed to reviewing factual records to test the reasonableness of declared positions. Taxpayers who anticipate these questions and prepare accordingly are better positioned to address concerns before they escalate.

Facts- and Law-Based Defense Strategy

One of the most important mindset shifts for taxpayers operating in China is to anchor audit defense in legal provisions and factual substance, rather than relying on relationship-driven tactics. While maintaining professional communication with tax officials remains important, particularly at the local level, the most effective and sustainable audit responses are those built on verifiable facts and clearly applicable legal grounds.

Key principles include:

· Defending based on substance even if contracts are imperfect: In practice, many multinational groups have legacy contracts or templates that do not align well with operational reality. In those cases, taxpayers should focus on explaining the actual conduct of the parties and referencing how that conduct satisfies relevant tax provisions.

· Identifying and citing the applicable legal rules or administrative guidance: This includes regulatory announcements, circulars, and implementation guidelines. An audit response that directly refers to a legal or regulatory basis carries more weight than a generic business explanation.

· Responding consistently across documents: Explanations offered during audit meetings, written responses, and internal reports should be lined up. Inconsistent statements can trigger deeper scrutiny.

By approaching audits in a legally grounded and professionally managed manner, taxpayers not only improve their chances of achieving a favorable outcome but also build credibility and earn the respect of the tax authorities. Demonstrating a well-documented, principled defense may also reduce the likelihood of recurring inquiries in future audit cycles.

Exerting Taxpayer Rights During Audit

Taxpayers in China enjoy a range of procedural rights that are often underused, particularly by foreign investment enterprises unfamiliar with the system. These rights are especially important when dealing with audit processes that deviate from prescribed procedures or when disagreements arise over the interpretation of law.

Key rights include:

· The right to timely notice and explanation: Taxpayers should receive formal notification of audits and explanations of the scope, basis, and findings. If that documentation is incomplete or missing, the taxpayer can request it.

· The right to contest proposed adjustments before they become final: Audit findings are typically shared with the taxpayer in a draft or preliminary form first, allowing time for clarification or challenge.

· The right to administrative reconsideration and, ultimately, litigation: If the taxpayer believes the assessment is incorrect, they may pursue an appeal (discussed in the next section, “Navigating Dispute Resolution”).

In recent years, there have been more cases in which taxpayers have pointed out procedural irregularities during the audit process — for example, the lack of proper authorization, improper timing, or incorrect application of law — and have succeeded in having audits narrowed or assessments withdrawn. While these situations require careful planning, evaluation, and communication, they reflect a broader trend toward procedural integrity within the audit process.

The most effective audit responses are those that combine technical rigor with legal grounding. Taxpayers should be confident in asserting their rights when appropriate and should treat audits not merely as administrative inquiries but as regulated processes governed by identifiable standards and procedures.

Navigating Dispute Resolution

When an audit results in a disputed adjustment, multinational companies in China are not limited to accepting the tax authority’s position or resolving the matter informally. China offers a structured, but often underused, dispute resolution framework that includes administrative reconsideration, tax litigation, and mutual agreement procedures under applicable tax treaties.

Although this framework does not always provide a direct reversal of audit outcomes, its strategic use can lead to more balanced resolutions, including reassessments, negotiated settlements, or withdrawal of excessive tax demands. This section outlines how each stage of the process functions in practice and how taxpayers can leverage these tools to assert their rights.

Administrative Reconsideration: First-Level Appeal

Administrative reconsideration remains the most commonly used formal appeal mechanism in China’s tax system. It allows the taxpayer to request an internal review by a higher-level unit of the tax bureau, one not directly involved in the original audit. This mechanism is particularly useful when the taxpayer believes that:

· the tax bureau’s interpretation of the law was incorrect;

· the audit involved procedural errors or omissions; or

· the factual findings of the tax auditors were not supported by the documentation presented by the taxpayer.

The appeal process opens space for further dialogue with the tax authority that is not a direct participant in the field examination, prompting a more detailed evaluation of facts and sometimes resulting in adjustments to the original assessment.

In the past, some companies were hesitant to escalate disputes to the administrative appeal or reconsideration stage out of concern that doing so might damage their relationship with the field audit team. There was a perception that challenging an audit decision could be seen as a personal affront to field examiners, potentially increasing the likelihood of future scrutiny. However, the reality today is quite different. Administrative appeals have become more widely accepted within the tax system as a legitimate and constructive part of dispute resolution. Tax auditors and senior officials alike increasingly recognize that taxpayers are fully within their rights to challenge audit outcomes they believe are incorrect.

When a mutually acceptable settlement cannot be reached at the audit level, pursuing an administrative review is appropriate. In practice, tax authorities have become more professional and understanding in general in response to such challenges, provided that the process is conducted in a respectful and well-reasoned manner. A growing number of recent administrative reconsideration cases demonstrate that taxpayers can request administrative reconsideration without harming long-term relationships with the local authorities.

Tax Litigation: A Better Path for Strategic Resolution

Although relatively few tax disputes in China proceed to court, litigation is becoming a more practical and influential tool in dispute resolution. Chinese courts handling tax cases have demonstrated an increasing willingness to examine whether tax authority actions conform to statutory and procedural rules.

In recent years, there have been cases in which taxpayers, both domestic and foreign-invested, have filed administrative lawsuits contesting auditors’ tax assessments. Even when courts do not formally rule against the tax authority, the proceedings have prompted local tax bureaus to reevaluate their position, withdraw the case, or offer to settle under revised terms.

This reflects a subtle but meaningful trend: Tax litigation may not always produce a final judgment in favor of the taxpayer, but it can lead to a reconsideration of disputed matters in a way that administrative channels alone may not achieve. Tax officials view courts as authoritative institutions, and the involvement of a court can shift how tax authorities approach a dispute, even behind the scenes.

A recent case in Shanghai illustrates this dynamic involving the issue (discussed above in “Individual Income Tax Withholding: Corporate Obligations”). A Chinese enterprise purchased supplies from an unrelated vendor based in northeastern China. After the local tax authority supervising the vendor determined that the vendor had engaged in false issuance of VAT invoices, it notified the Shanghai tax bureau overseeing the purchaser. Based on that notice, the Shanghai authorities denied the purchaser’s right to claim input VAT credit on the grounds that the invoices issued by the vendor were noncompliant. Although the underlying transaction was genuine and the purchaser had no knowledge of the vendor’s misconduct, the administrative appeal did not overturn the adjustment. The purchaser later filed a lawsuit with the Shanghai Railway Transportation Court. During the proceedings, the court summoned a senior tax official responsible for the vendor, who complied with the court’s order and appeared in person to testify in Shanghai after traveling a long distance.² The case resulted in an out-of-court settlement that allowed the taxpayer to retain the VAT credit.

The case demonstrates both the heightened willingness of taxpayers to use litigation as a dispute resolution tool and the increasing effectiveness of the courts in facilitating objective reconsideration. Rather than simply deferring to the tax authorities, the court took meaningful steps that changed the trajectory of the dispute, underscoring the evolving role of the judiciary in China’s tax administration landscape. For multinational groups facing large or principled disputes, litigation may now be seen as a viable component of their overall resolution strategy, not necessarily as the end goal but as a means to secure a more balanced result.

MAP: A Context-Dependent Option

For certain cross-border tax disputes, particularly those involving the application of tax treaties, MAP may be available as a supplemental channel of resolution. MAP brings in a dialogue between China’s competent tax authority and that of a treaty partner jurisdiction, with the aim of resolving unmatching tax treatments.

In practice, however, the usefulness of MAP depends heavily on the context of the dispute. It may be better suited for addressing cases of double taxation, such as when two jurisdictions assert taxing rights over the same income, rather than for contesting a unilateral adjustment made solely under Chinese domestic rules. For example, MAP may be more effective in coordinating transfer pricing outcomes across jurisdictions than in overturning the denial of a deduction for a service fee in China. In appropriate circumstances, MAP may be used in conjunction with domestic remedies to support a consistent treatment across jurisdictions.

Conclusion: Strategic Defense in a Changing Tax Environment

As China’s tax administration continues to evolve, multinational companies operating in the country are entering an environment that is more structured, more data-informed, and increasingly governed by procedural expectations. Audits remain, in many ways, case specific and locally administered, but the broader trends point to a system that rewards preparation, legal discipline, and documentation-backed compliance.

The expansion of audit coverage through system-generated risk indicators and informal review mechanisms means that nearly any taxpayer could find itself subject to review. At the same time, the growing use of administrative reconsideration, the measured rise of tax litigation, and the potential reforms under the draft TCAL indicate that taxpayers are gaining more defined channels through which to resolve disputes.

In this context, companies are best served by adopting an audit defense posture grounded in both factual substance and applicable legal rules. This entails maintaining documentation that reflects the genuine commercial nature of intercompany transactions and ensuring consistency among actual business operations, contractual terms, and tax reporting. When facing audit inquiries, companies should be ready to support their tax positions by citing specific legal provisions or regulatory guidance, rather than placing undue reliance on informal relationships.

Equally important is the willingness to assert taxpayer rights during the audit process. This includes pointing out procedural irregularities when they occur, asking for clarifications or adjustments when warranted, and, where necessary, pursuing administrative or judicial review. Those actions are not confrontational. They are part of China’s more formalized tax governance framework, and taxpayers who constructively engage in the process are more likely to achieve equitable outcomes.

For multinational tax teams managing Chinese subsidiaries from abroad, there is one key takeaway: Success in today’s Chinese tax environment requires a deliberate blend of readiness, legal rigor, and procedural engagement. Relationship building and practical flexibility still matter, but they are no longer sufficient on their own. The most resilient companies will be those that pair local execution with a globally aligned, law-based approach to tax risk management.

FOOTNOTES

¹ The machine’s so-called water-surfing mode uses a nozzle and water pump to create a high intensity spray mechanism.

² It is very rare in China that an official outside the local jurisdiction of the taxpayer/purchaser is called upon to travel long distance and appear in front of a court to testify. It is highly significant and touted by the Shanghai Railway Transportation Court as a major innovation.