Editor's Note: Under the situation of continuous adjustment of China's economic structure and increasingly fierce market competition, the business risks and financial pressures of enterprises are increasing, and the number of bankruptcy cases continues to rise. Tax disputes in bankruptcy procedures are becoming more and more prominent, the court accepted the bankruptcy application after the late payment of tax claims recognized as one of the controversial issues. This paper takes typical judicial cases as an entry point, and analyzes the relevant provisions in depth, aiming to provide clear ideas and useful references for solving the problem of determining the claims.

01 Dispute between the Tax Bureau of Lhasa Economic and Technological Development Zone and Purple Communication Company over the Confirmation of Bankruptcy Claims

(i) Basic facts of the case

Purple Communication Company is registered in Lhasa Economic and Technological Development Zone, Tibet.At the time of the 2020 enterprise income tax settlement, the company was required to pay more than RMB20.58 million in taxes, and applied for an extension of payment on May 27, 2021 due to a shortage of funds, and the TAR Tax Bureau granted it until August 31, 2021 to settle the taxes.

However, on August 27, 2021, Purple Light Group and seven other companies belonging to Purple Light Communication Company were all insolvent and were adjudicated by the Beijing No. 1 Intermediate People's Court for bankruptcy and reorganization. On September 1, 2021, the Tax Bureau of Lhasa Economic Development Zone issued a Notice of Tax Matters to Zilight Communications Company, requesting the payment of more than RMB20,580,000 in taxes by a certain deadline, with late payment charges to be imposed from September 1, 2021 On December 22, 2021, the Beijing No. 1 Intermediate People's Court ruled to confirm that the Tax Bureau of Lhasa Economic Development Zone was entitled to a tax claim of more than RMB20,580,000 against Zilight Communications Company. On January 14, 2022, the court ruled to approve the reorganization plan and terminate the reorganization process.

On February 26, 2022, the Tax Bureau of Lhasa Economic Development Zone declared a late payment claim of over RMB18.32 million to the bankruptcy administrator, with the calculation period from September 1, 2021 to February 26, 2022, and the administrator refused to accept the review. On July 13 of the same year, the Beijing No. 1 Intermediate People's Court ruled that the implementation of the reorganization plan was completed and the reorganization process was terminated. During the reorganization process, Purple Communication completed the settlement of more than RMB20.58 million in taxes, but failed to settle the corresponding late payment fees. Subsequently, the Tax Bureau of Lhasa Economic Development Zone sued it to the court, requesting confirmation that the late payment of over RMB18.32 million constituted an ordinary claim and that the administrator was at fault for failing to register and confirm the failure to settle the claim.

(ii) Points of contention in the case and the views of the parties

The dispute in this case centered on whether the tax late payment arising after the court accepted the bankruptcy petition could be recognized as a bankruptcy claim. The Plaintiff, Lhasa Economic and Technological Development Zone Taxation Bureau, argued that it had an ordinary claim against Purple Communication Company for late payment of taxes, which was calculated as 18.32 million RMB until February 26, 2022, based on the tax amount of 20.58 million RMB, and accrued five ten-thousandths of one percent on a daily basis starting from September 1, 2021, until the tax amount was paid in full. On the other hand, the defendant, Purple Communication Company, argued that the starting date of late payment due to non-payment of tax was later than the date of bankruptcy acceptance, and the late payment of tax should not be calculated and determined, which led to a dispute between the two sides of the tax enterprise.

(iii) Court decisions

The Beijing No.1 Intermediate People's Court held that the calculation of the late payment fee should be stopped after the bankruptcy proceedings were accepted by Purple Communication Company, and the time of stopping the interest was August 27, 2021; and the tax authority claimed that the starting date of the late payment fee was September 1, 2021, which was later than the date of acceptance of the bankruptcy, therefore, the tax authority's claim was unfounded in the law and unsupportable, and ruled to reject the litigation request of the Tax Bureau of Lazhajiakai District.

02 Internal order of satisfaction of insolvency claims in enterprise insolvency

Before discussing whether the tax late payment arising after the acceptance of the bankruptcy application can be recognized as a bankruptcy claim, it is necessary to clarify the internal order of liquidation of bankruptcy claims in enterprise bankruptcy. The Enterprise Bankruptcy Law stipulates the principle of fair settlement, aiming at the fair liquidation of claims and debts and the protection of the legitimate rights and interests of creditors and debtors. According to Article 113 of the Enterprise Bankruptcy Law, bankruptcy claims can be categorized into priority bankruptcy claims and ordinary bankruptcy claims according to the order of satisfaction. Specifically, priority bankruptcy claims include employee claims and tax claims, while other bankruptcy claims are ordinary bankruptcy claims. Therefore, the internal order of liquidation of bankruptcy claims can be summarized as follows: employee claims - tax claims - ordinary claims.

Although the Enterprise Bankruptcy Law broadly categorizes bankruptcy claims according to the order of liquidation, the definition of the scope of each type of bankruptcy claim is not exhaustive, leading to frequent related disputes in practice. The disputes in the aforementioned cases arose mainly for the following two reasons:

On the one hand, the interest game between tax authorities and bankrupt enterprises in enterprise bankruptcy is more anxious. The tax authorities emphasize the mandatory and public welfare nature of taxation, and believe that the late payment of taxes should be fully protected as far as possible, and for the sake of avoiding the risk of law enforcement, they also advocate and declare the claims; while the bankrupt enterprises hope to minimize the burden of debt, and are inclined to calculate the late payment of taxes in accordance with the strict cut-off time. On the other hand, the Enterprise Bankruptcy Law, as a superior law, has not made clear provisions on the late payment of taxes after the acceptance of bankruptcy application, and the relevant basis for the determination is mostly from the normative documents and judicial policy documents, which further aggravates such disputes due to the imperfections in the system.

03 Evolution of the rules for the recovery of late tax payments following the admission of an insolvency petition

The Enterprise Bankruptcy Law does not explicitly mention the issue of compensation for late payment of taxes, and only stipulates in article 46 that claims with interest shall cease to accrue interest from the time the bankruptcy application is accepted. Article 32 of the Law on Administration of Tax Collection also only provides that a late payment fee of five ten thousandths of a cent shall be added on a daily basis from the date of late payment of tax, but it does not specify whether the late payment fee arising from unpaid tax belongs to the bankruptcy claim, which leads to inconsistency in understanding and application in practice. So, what are the provisions of relevant normative documents and judicial policy documents in practice? We further analyze.

The Reply of the State Administration of Taxation on the Issue of Tax Priority Including Late Payment Fee (Guo Shui Han [2008] No. 1084) holds that, "in accordance with the spirit of the legislation of the Tax Collection and Administration Law, the order of both late payment fee and fine is different in the levy and payment of tax, and late payment fee is regarded as the management of tax at the time of levy, and the tax is enforced, the tax is cleared from the territory, and the tax is recovered and levied, Tax enforcement, outbound tax clearance, tax recovery, reconsideration preconditions and other relevant provisions clearly stipulate that the late payment fee is paid at the same time with the tax. This spirit of the law also applies to cases such as tax priority, which, when enforced, includes the tax and its late payment as stipulated in Article 45 of the Tax Administration Law." Accordingly, the tax authorities declared the taxes and late fees together at the time of enforcement, and considered it irrelevant whether bankruptcy was initiated or not.

However, the Supreme Court took a different view. The Reply to the Issue of Whether the Claim Confirmation Complaint Filed by the Tax Authorities on the Late Payment of Taxes Owed by Bankrupt Enterprises Should Be Accepted (Fa Shi [2012] No. 9) stipulates that "the late payment of taxes owed by a bankrupt enterprise prior to the acceptance of the bankruptcy case belongs to the ordinary bankruptcy claims. For late payment fees arising from unpaid taxes after the bankruptcy case is accepted, the people's court shall deal with them in accordance with the provisions of Article 61 of the Provisions of the Supreme People's Court on Several Issues Concerning the Trial of Enterprise Bankruptcy Cases". And Article 61 of the Provisions of the Supreme People's Court on Several Issues Concerning the Trial of Enterprise Bankruptcy Cases (Legal Interpretation [2002] No. 23) stipulates that late payment fees arising from the debtor's failure to pay the amount due after the acceptance of the bankruptcy case by the people's court, including late interest and labor insurance premiums that should be doubled if the debtor fails to execute the effective legal instrument, do not belong to the bankruptcy claim. According to this provision, only the late payment of taxes that have been calculated before the bankruptcy acceptance can be compensated as an ordinary claim, and the late payment arising from unpaid taxes after the bankruptcy acceptance is no longer treated as a bankruptcy claim, and thus does not belong to the ordinary claim.

The above two documents reflect two different views, the former of which holds that late payment is managed on an equal footing with taxes and receives equal priority for compensation, while the latter characterizes late payment incurred prior to the acceptance of the bankruptcy application as an ordinary bankruptcy claim calculated up to the date of acceptance of the bankruptcy application. The judicial interpretation of the Supreme Court, from the perspective of the characterization of late payment and the protection of the legitimate rights and interests of other creditors, is in line with the spirit of Article 46 of the Enterprise Bankruptcy Law, which stipulates that "Claims with interest shall cease to accrue interest from the time of acceptance of the bankruptcy application", and is more authoritative.

In addition, Article 3 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Enterprise Bankruptcy Law (III), which came into effect on March 28, 2019, stipulates that "after the bankruptcy application has been accepted, late fees arising from arrears of payments by the debtor, including late interest on delayed payments and late payment of labor insurance premiums that should be doubled if the debtor fails to comply with the effective legal instrument. If the creditor declares it as a bankruptcy claim, the people's court shall not recognize it." This is consistent with the spirit of the Supreme Court's 2012 reply, which differentiates the treatment of late payment fees in terms of bankruptcy acceptance. In December of the same year, the Announcement of the State Administration of Taxation on Several Matters Concerning Tax Levy and Administration (SAT Announcement No. 48 of 2019) explicitly stated that tax late fees in bankruptcy liquidation procedures are to be calculated at the cut-off date of bankruptcy acceptance. Although the Announcement targets bankruptcy liquidation enterprises, the connotation and extension of the concept of tax late payment itself should be consistent, and bankruptcy reorganization enterprises can also refer to the implementation.

It can be seen that the General Administration of Taxation and the Supreme Court have basically moved from a difference of opinion to a consensus on the issue of late payment of taxes. The tax authorities give up the claim for late payment of tax after the bankruptcy acceptance, which is in fact a transfer of their own tax interests, and its purpose is to protect the rights and interests of ordinary creditors, and it also demonstrates the attitude of "the state does not compete with the people for profits". Therefore, according to the existing provisions, the late payment fees arising from unpaid taxes after the bankruptcy case is accepted do not belong to the bankruptcy claims.

04 Conclusion

Whether it is the sorting out of relevant laws and regulations or the corroboration of judicial practice cases, it can be concluded that, in the enterprise bankruptcy procedure, the late payment of taxes arising from unpaid taxes after the acceptance of the bankruptcy application should not be recognized as a bankruptcy claim. However, it is still inconclusive as to whether it is of the nature of an inferior claim, and whether it should be discharged or not recognized in the course of the continued operation of the enterprise or the remaining property after the completion of the execution of the bankruptcy and reorganization plan, which may give rise to new disputes in practice. In conclusion, it is recommended that the bankrupt enterprise and the liquidation group, with the support of tax lawyers, assist the administrator to strictly examine the legality of the claims declared by the tax authorities and carry out benign communication with the tax authorities, so as to reduce the disputes arising from the claims declared, promote the smooth progress of the bankruptcy proceedings and effectively safeguard the legitimate rights and interests of all parties.