Joint tax audits by eight Chinese authorities in 2025

published on 14 November 2025 | reading time approx. 3 minutes

Recently, the Chinese tax authorities announced a new initiative to combat tax offences. The State Taxation Administration is collaborating with seven other authorities - including the Ministry of Public Security, the courts, the public prosecutor's offices, the banking sector, customs, the State Market Regulation Authority and the State Foreign Exchange Administration – to conduct joint investigations and to crack down severely on tax-related illegal activities.

Cooperation mechanisms between authorities

Cooperation between authorities is based on three cornerstones:

1. Comprehensive data exchange

The core of Golden Tax Phase IV lies in ‘digitalised taxation’, enabling the full integration of information from various areas such as taxation, banking, customs, market regulation and foreign exchange control. The Golden Tax Phase IV system reconciles information such as invoices, incoming payments, bank transfers, employee social security data and capital changes. If irregularities are detected, the system can automatically raise audit flags.

2. Coordinated administrative measures

The institutions involved pursue a coordinated approach, which includes administrative reviews, criminal investigations, legal proceedings, asset preservation measures and foreign exchange controls. Investigations may extend beyond the companies directly involved to include their business partners and supporting service providers.

3. Blacklist and joint sanctions

Companies that are blacklisted due to violations face sanctions from all participating authorities. These may include restrictions on borrowing, exclusion from public tenders, consumption restrictions for responsible persons, and stricter border controls.

In focus: Nine categories of companies

This expanded supervision focuses on the following nine categories of companies:

I. Companies with sustained losses

Companies that report losses for three consecutive financial years, do not pay corporation income tax but still have high operating expenses for sales, administration, finance and other areas, and continue to operate are considered unusual.

II. Companies with unusual inventories

Companies with a discrepancy between purchases and sales, or those with long-standing input tax credits, may be suspected of potential invoice fraud or concealed income by the tax authorities.

Indicator 1: (End-of-period inventory - Annual revenue) ÷ Annual revenue > 50 percent
Indicator 2: Inventory levels inconsistent with operational scale or industry norms
Indicator 3: Excessively large or anomalous inventory balances

III. Companies on the borderline of tax breaks

The focus is on the artificial manipulation of turnover or profits in order to remain just below the thresholds for tax breaks. This applies particularly to companies with a turnover just below the VAT liability threshold or profits just below the corporation income tax minimis threshold.

Small-scale Preferential Warning - Indicator: Quarterly sales revenue consistently between ¥250,000 and ¥300,000.
Small Low-Profit Enterprise Preferential Warning - Indicator: Taxable income between ¥2.7 million and ¥3 million.
R&D Expense Warning - Indicator: Variation rate of R&D expenses relative to total profits >20 percent.

IV. Letterbox companies

Companies that issue a high volume of invoices for a few months shortly after being established and then either deregister or disappear, are classic targets of fraud investigations.

V. Sole traders with a short period of activity

Sole traders who issue invoices in the amount of the tax thresholds immediately after registration and deregister shortly thereafter will be subject to close investigation.

VI. Companies with conspicuous export tax refunds

Customs authorities work closely with tax and foreign exchange authorities to prevent practices such as fictitious exports, overvaluation of export goods or falsification of goods categories to obtain higher refund rates.

VII. Companies with implausible income-cost ratios

Tax audits are triggered by extreme discrepancies between income and expenses that cannot be justified by the business model, especially if the increase in input VAT exceeds 20 percent of the increase in output VAT. This applies to excessive expenses and unreported income alike.

VIII. Companies with inconsistent purchasing and sales data

Warning signs include discrepancies in inventory management, such as the purchase of one category of goods and the sale of another, or unusually large fluctuations in input VAT and sales tax amounts.

IX. Companies with conspicuous annual financial statements

Certain key figures in annual financial statements that companies submit to the tax authorities may lead to a tax audit if they appear unusual. Examples include unusually high receivables, excessive liabilities, and conspicuous changes in items such as advance payments.

Indicator 1: (Accounts Receivables + Other receivables + Prepayment) ÷ total assets > 30 percent
Indicator 2: (Accounts payables + Other liabilities + Received advance payments) ÷ Total assets > 30 percent
Indicator 3: Balance of advance payments made / Operating income > 20 percent
Indicator 4: New Accounts Payables for the year exceed 80 percent of Operating Revenue

Conclusion

Against the backdrop of the Golden Tax Phase IV initiative, which encourages ‘digitalised taxation’ and intensified cooperation between the relevant authorities, ensuring compliance with tax regulations is of crucial importance. Companies falling into the above categories are advised to carry out immediate self-assessments, identify potential tax irregularities or errors and initiate corrections where necessary. This will help to reduce tax risks and the resulting high tax liabilities. Proactive measures are the most effective way to mitigate risks in these areas.

If you need support in this regard, please do not hesitate to contact us immediately! We will be happy to help you.

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