Editor's Note: Tax-related issues in enterprise bankruptcy procedures are inevitable. Proper handling of historical taxes and fees of bankrupt enterprises, nascent taxes and fees in bankruptcy procedures and tax and fee write-offs after bankruptcy are of great significance to the smooth and efficient operation of the bankruptcy mechanism. Recently, in response to an invitation from ZHONGGUO SHUIWU, Liu Tianyong, chief lawyer of Hwuason Law Firm, Director of the Finance and Tax Law Committee of the All-China Lawyers Association, and Zhang Qian, partner lawyer of Hwuason Law Firm, wrote an article entitled "Whether historical undeclared taxes are tax claims when a business goes bankrupt", which was published in No. 1 of the 2024 issue of ZHONGGUO SHUIWU. Taking a practice case as the starting point, this article discusses whether historical undeclared tax is a tax claim in the enterprise bankruptcy procedure from the definition of "tax owed" and further analyzes the tax-related issues in the disposal of bankruptcy property. The full text is as follows:

Whether historical undeclared taxes are tax claims when a business goes bankrupt

Author: Liu Tianyong, Zhang Qian

      Basic facts of the case

      Enterprise A applies to the People's Court for bankruptcy due to poor operation, and after the Court ruled to accept the bankruptcy application of Enterprise A, it issues a notice of claim declaration to the competent tax authority of Enterprise A, informing it that it has accepted the bankruptcy application of Enterprise A and inviting the tax authority to declare the tax claims to the administrator within the specified period. Upon receipt of the notice of claim declaration, the tax authority verified and checked the tax payment status of Enterprise A. Upon inquiry, it was found that the property and land under the name of Enterprise A had not been declared for property tax and urban land use tax, and the system had not generated any information of tax arrears in this regard.

      Under such circumstances, there are many disputes as to whether the competent tax authorities can declare claims on the historical undeclared taxes of the bankrupt and participate in the distribution of bankruptcy property accordingly. On the one hand, there is no conclusion as to what is the "tax owed" by the bankrupt in the Enterprise Bankruptcy Law of the People's Republic of China (hereinafter referred to as the Enterprise Bankruptcy Law), and whether the historical undeclared tax of the bankrupt belongs to the tax claims, etc. On the other hand, the handling of the historical undeclared tax by the tax authorities will affect the tax and fee commitment of the subsequent property disposal process, and if it is not dealt with, the tax authorities may have to bear the tax and fee. On the other hand, the treatment of the bankrupt's historical undeclared taxes by the tax authorities will affect the issue of tax liability in the subsequent disposal of property, which, if not properly handled, will lead to more disputes and affect the progress of the bankruptcy proceedings.

      Whether tax claims can be filed for undeclared taxes

      Article 113 of the Enterprise Bankruptcy Law stipulates the order of liquidation of the bankruptcy estate in the liquidation procedure, in which the tax claims are expressed as "taxes owed" by the bankrupt. How to understand the "taxes owed" stipulated in the Law is directly related to the scope of tax claims.

      The concept of "taxes owed" by the bankrupt. The Announcement of the State Administration of Taxation on Several Matters Concerning Tax Levy and Administration (Announcement No. 48 of 2019) (hereinafter referred to as Circular 48) is the main reference document for dealing with tax-related issues in the enterprise bankruptcy procedure at present, and plays a role in defining and standardizing the interface between the enterprise bankruptcy procedure and tax levy and administration.Article 4 of Circular 48 stipulates that the tax authorities shall declare the taxes (including education fee surcharges, local education surcharges and penalties) owed by an enterprise to the administrator within the period of time for declaration of claims announced by the People's Court. Article 4 of Circular 48 stipulates that the tax authorities shall, within the time limit for declaration of claims announced by the People's Court, declare to the administrator the taxes (including education surcharges and local education surcharges, the same hereinafter), late payment fees and penalties owed by the enterprise. The interest arising from special tax adjustments shall also be declared. Article 1 of Circular 48 on tax arrears states, "The tax arrears referred to in this article refers to the taxpayers, withholding agents and tax guarantors who have exceeded the amount of taxes specified in the tax laws and administrative regulations, as determined by Articles 3 and 13 of the Measures for the Announcement of Tax Arrears (for Trial Implementation) (published by Decree of the State Administration of Taxation No. 9, amended by Revision No. 44), and who have exceeded the amount of taxes specified in the laws and administrative regulations on taxation. taxpayers, withholding agents and tax guarantors who have failed to pay the taxes for more than the period prescribed by the tax laws and administrative regulations or for more than the tax period determined by the tax authorities in accordance with the provisions of the tax laws and administrative regulations".

      Among them, Article 3 of the Measures for the Announcement of Tax Arrears (for Trial Implementation) stipulates that tax arrears refer to the taxes that have not been paid by the taxpayer beyond the time limit stipulated by tax laws and administrative regulations or by the taxpayer beyond the time limit for payment of taxes determined by the tax authorities in accordance with tax laws and administrative regulations, including: (1) the taxes that the taxpayer fails to pay within the time limit for the payment of taxes after tax declaration has been processed; (2) the tax period of the tax payment that has been extended with approval (2) the taxpayer fails to pay the tax within the tax payment deadline after the tax declaration has been processed; (2) the taxpayer fails to pay the tax within the tax payment deadline after the tax payment deadline for the approved tax extension has expired; (3) the taxpayer fails to pay the tax within the tax payment deadline after the tax inspection has determined the taxpayer's tax payable; (4) the taxpayer fails to pay the tax within the tax payment deadline after the tax authority has approved the taxpayer's tax payable in accordance with the Taxation Levy and Administration Law of the People's Republic of China (hereinafter referred to as the Law of the People's Republic of China on Taxation Levy and Administration); (5) other taxpayers who have not paid the taxes within the tax payment deadline ) other taxes that the taxpayer has not paid within the tax payment deadline. It can be seen that the "tax owed" in the bankruptcy proceedings is the tax owed in the tax law, which refers to the unpaid tax that the taxpayer has exceeded the deadline for tax payment.

      Whether undeclared taxes are "taxes owed". With regard to the interface between the enterprise bankruptcy law and tax collection and management, there is considerable controversy in practice as to whether undeclared taxes that should have been declared by the bankrupt belong to the "taxes owed" under the enterprise bankruptcy law. There is a view that the taxes owed by the bankrupt only include the taxes that have actually arisen, such as the taxes that have been declared but not paid by the bankrupt or the taxes that should have been paid but have not been paid by the inspection and remediation, etc., and should not include the taxes that should have been declared but have not been declared, which have not been declared and have not formed the taxes owed. Such undeclared taxes do not form tax arrears. The cases of "tax arrears" stipulated in the Measures for the Announcement of Tax Arrears (for Trial Implementation) are all tax arrears that have exceeded the deadline for the payment of taxes. There is also a view that, on the one hand, a taxpayer who has committed a taxable act is obliged to complete the tax payment obligation since the tax obligation occurs, and the failure to complete the tax declaration and tax payment within the deadline for tax settlement constitutes a tax arrearage from the point of view that the substance is more important than the form; on the other hand, due to simple and clear calculation of the property tax, urban land use tax and other taxes, in the event of the taxpayer failing to make a declaration, the tax authorities can directly obtain the exact amount of unpaid tax. directly obtain the exact amount of unpaid tax due from the taxpayer and then file a claim in the form of tax arrears.

      In the author's opinion, in the bankruptcy procedure, the tax authorities cannot directly declare the tax claims on the taxpayers' historical undeclared taxes, mainly due to the following three reasons: Firstly, both the Enterprise Bankruptcy Law and Article 48 stipulate that the "owed taxes" shall be the unpaid taxes exceeding the deadline for payment of taxes, and shall not include the taxes that should be declared by the bankrupts but have not been declared; secondly, the vast majority of taxes in China adopt the tax collection and management method of taxpayers' self-declaration. Secondly, the vast majority of taxes in China are collected and managed by taxpayers' self-declaration, and in the case where taxpayers do not declare on their own initiative, the taxable behavior's tax basis and amount of tax are not yet clear, and the tax authorities cannot declare and participate in the distribution of bankruptcy estates based on such uncertain "tax claims"; thirdly, the question of whether the tax authorities have the right to make claims for historical undeclared taxes; thirdly, the question of whether the tax authorities have the right to make claims for historical undeclared taxes. Thirdly, whether the tax authorities have the right to file claims for historical undeclared taxes also depends on whether or not the taxes have passed the recovery period; for undeclared taxes that have passed the recovery period, the tax authorities cannot recover them, and the filing of tax claims is also out of the question.

      Issues of concern for tax authorities filing tax claims

      How the undeclared taxes form the tax arrears. Undeclared taxes can only be declared after the corresponding tax procedures have been completed to form tax debts, at which time the recovery period of the tax needs to be considered. The Tax Collection and Management Law stipulates the tax recovery period in three cases: if the taxpayer fails to pay or pays less tax due to the responsibility of the tax authorities, the recovery period is three years, and no late fee shall be charged; if the taxpayer fails to pay or pays less tax due to the mistake of calculation and other mistakes, the tax authorities can recover the tax and late fee within three years, which can be prolonged to five years under special circumstances; and there is no limitation of the recovery period in the case of tax evasion, tax resistance and tax fraud. For tax evasion, tax resistance and tax fraud, there is no limitation on the period of recovery. Currently, the Law on Administration of Tax Collection has not made clear provisions on the application of the recovery period for "failure to make tax declaration". The Reply of the State Administration of Taxation on the Issue of the Recovery Period for Failure to Declare Taxes (GuoShuiHuan [2009] No. 326) (hereinafter referred to as Reply No. 326) stipulates that, as stipulated in Paragraph 2 of Article 64 of the Law on Administration of Tax Collection, a taxpayer's failure to make tax declaration causes the taxpayer to be subjected to the following penalties The situation of non-payment or underpayment of tax due as a result of a taxpayer's failure to make a tax declaration does not belong to tax evasion, tax resistance or tax fraud, and its recovery period is generally three years in accordance with the spirit of Article 52 of the Law on Administration of Tax Collection, and can be extended to five years under special circumstances. It can be seen that there is an essential difference between failure to make a tax declaration and tax evasion, and that failure to make a tax declaration has not yet reached the degree of infringement of legal interests in the case of tax evasion, which is "refusing to make a declaration after being notified to do so", so that it cannot be equated with tax evasion.

      In practice, there are quite a number of courts that have made a determination with reference to the 326th approval, for example, Zibo Intermediate People's Court of Shandong Province made (2021) Lu 03 line final No. 52 that Liu Moumou and his wife's behavior of failing to declare taxes on the income from the transfer of equity interests belonged to the situation stipulated in Paragraph 2 of Article 64 of the Law on Administration of Taxation Levies, that is, "If the taxpayer fails to make a tax declaration, fails to pay or underpays taxes". It does not belong to the cases of tax evasion, tax resistance and tax fraud which can be pursued indefinitely as stipulated in Paragraph 3 of Article 52 of the Law, and the period of pursuing the case of non-payment or underpayment of tax due due to the failure to file tax declaration shall be three years, which can be extended to five years under special circumstances. Therefore, the tax authorities shall pay attention to whether the recovery period has expired when recovering the historical undeclared tax of the bankrupt; if it is determined that the bankrupt has subjective tax evasion intention for the undeclared tax, which is in line with the constituent elements of tax evasion, there is no limitation on the recovery period; if it does not constitute tax evasion, the recovery period of three or five years shall be applied.

      For the undeclared tax within the recovery period, the tax authorities need to perform a series of reminder or inspection procedures so that the undeclared tax will be declared again after the undeclared tax is in arrears. However, in practice, there are different regulations on whether the tax authorities can initiate tax inspection in bankruptcy proceedings. For example, the Shanghai Municipal Higher People's Court and the Shanghai Municipal Taxation Bureau of the State Administration of Taxation jointly issued the "Implementation Opinions on Optimizing the Handling of Tax-Related Matters in the Bankruptcy Procedures of Enterprises" in 2020, pointing out that after an enterprise enters into bankruptcy procedures, the tax authorities generally will no longer start the tax inspection procedures, except for the cases where major clues of violation of the law are found that must be investigated and dealt with. The Guide for Handling Matters issued by the Shenzhen Tax Bureau of the State Administration of Taxation has also made similar provisions; while the provisions of the insolvency proceedings in Quzhou and Wenzhou on tax and fee issues point out that the administrator who finds that the debtor enterprise is suspected of failing to declare the tax in full during the insolvency proceedings shall promptly report to the court accepting the insolvency case and the competent tax sub-bureaus and the local departments shall carry out tax inspections of the debtor enterprise according to the law in a bid to make a good job of the tax (fee) declaration prior to the final distribution of insolvency property. ) claims of the debtor enterprise before the final distribution of the bankruptcy property. In the aforementioned case, if the tax authorities check and supplement the undeclared tax of Enterprise A through tax inspection, they need to first issue tax documents to Enterprise A, conduct tax inspection on it, determine the amount of tax payable, and order it to pay the tax and the late payment fee within a certain period of time. After the expiration of the deadline for payment of taxes, Enterprise A still fails to pay the corresponding taxes, until the expiration of the deadline for reconsideration and other remedies, the right to remedies is lost, the tax that is the formation of the tax arrears, the tax authorities can be based on the tax arrears of Enterprise A to declare the debt of the tax claims.

      Declaration of tax arrears within the claim filing period. After clarifying the scope of "taxes owed" by the bankrupt, if the tax authorities want to declare claims for taxes owed for undeclared taxes, they have to do so within the period for declaration of claims before they can participate in the distribution of bankruptcy property in the liquidation procedure. Article 48 of the Enterprise Bankruptcy Law stipulates that the creditors shall declare their claims to the administrator within the claim declaration period stipulated by the People's Court. Circular 48 further stipulates in the field of taxation that the tax authorities shall declare the taxes owed by the enterprises (including education surcharges and local education surcharges), late payment fees and penalties to the administrator within the claim declaration period announced by the People's Court. For audit cases that are complex and take a long time to investigate, some places have made more detailed provisions on supplementary declaration of tax claims, such as the Minutes of the Zhejiang Provincial Higher People's Court of the State Administration of Taxation of Zhejiang Province on the Optimization of Handling of Tax-Related Matters in the Case of Enterprise Bankruptcy, which stipulates that, if the tax authority misses the deadline for declaration of claims due to the complexity of the case or the time consuming time to investigate and clear the tax claims, the tax authority can declare the claims within the deadline announced by the bankruptcy property The tax claims can be additionally declared before the distribution plan is finally submitted to the creditors' meeting for voting. In reorganization proceedings or settlement proceedings, the deadline for supplementary declaration of tax claims is before voting on the draft reorganization plan or settlement agreement. Therefore, for undeclared taxes, if the tax authorities determine the owed taxes by initiating the audit procedure, they need to pay attention to the connection between the audit period and the deadline for filing claims, so as to avoid missing the filing period.

      Tax-related issues in the disposal of bankruptcy property

      Generally, the bankruptcy property is distributed in monetary form, and the realization of the bankruptcy property is usually realized through auction. In the aforementioned case, if the land and property involved in the case were to be auctioned, it would involve the issue of bearing taxes and fees between the buyer and seller in the auction procedure. "All taxes and fees arising from the transfer of ownership of the subject matter of the auction shall be borne by the buyer" and other "tax" agreement is commonly found in auction notices, although its effectiveness is controversial, but it is still a common clause in the current auction transactions. In practice, in order to protect the national tax source, most of the tax authorities in the discovery of the existence of bankruptcy history of undeclared taxes, may choose to real estate transfer link to pursue the collection of tax, requiring both parties to the transaction in the completion of the tax clearance before you can apply for the change of ownership of real estate ownership registration. Under the aforementioned tax package clause, the tax in the auction is usually borne by the buyer, who is also required to bear the historical undeclared tax on the subject matter of the auction after the bidding is successful in order to be able to successfully handle the transfer procedures. This situation increases the economic burden of the buyer, if the buyer can not accept will also hinder the smooth progress of the bankruptcy proceedings. In this regard, there are continuous disputes in practice. For example, whether the tax authorities have the right to trace the historical undeclared taxes in the transfer process, whether the undeclared taxes should be borne by the seller or the buyer.

      Taxes and fees in the transfer process should be limited to the act of property transfer. In the author's view, the auction transaction of the bankruptcy property is essentially the property transfer behavior of the bankrupt enterprise, and the taxes and fees involved in the auction process should be only the taxes and fees in the property transfer segment, and should not include the historical unpaid taxes and fees on the subject matter of the auction. In the aforementioned case, no matter how the tax provisions are agreed upon, the scope of the tax should be limited to the taxes and fees involved in the transfer of the immovable property and should not be extended to the unpaid taxes and fees from past acquisitions, the use of the subject property or previous transactions.

      Should fully protect the buyer's right to know the subject matter. In the author's view, the buyer before the auction should try to due diligence on the subject matter of the auction, and the transferor to agree on the scope of taxes and fees, including the type of tax to be borne, the links involved. At the same time, in the auction procedure, the transferor should also fully protect the buyer's right to know, to network judicial auction, for example, according to "the supreme people's court on the people's court network judicial auction a number of issues of the provisions of article 14," "the implementation of the network judicial auction, the people's court shall be in the day of the auction notice issued through the network judicial auction platform on the following matters to be Special tips: ...... (iii) known defects and burden of rights of the auctioned property", then the transferor should fully inform the bidders of the defects of the subject matter of the auction in the auction notice, including the history of unpaid taxes and taxes that may be involved in the auction process, etc., to give the bidders the right to be fully informed and the right to choose, to avoid subsequent The bidder shall be given the right to be fully informed and the right to choose, so as to avoid subsequent disputes.