Editor's Note: In recent years, China has continuously strengthened the levy and supervision of consumption tax in the refined oil products sector. Audit authorities, exercising their statutory powers during audits of tax collection conducted by tax authorities at all levels, have also been intensifying their audits of refined oil products consumption tax. They conduct extended audit investigations of key enterprises and transfer tax administration clues to tax departments in the form of audit reports, urging tax departments to strengthen tax supervision and tax inspection. In practice, questions arise as to whether audit reports and audit opinions issued by audit authorities can directly serve as the law-enforcement basis for tax departments to recover and collect taxes, whether investigated enterprises have corresponding relief channels and rights, and how they should respond to related audit risks. This article provides a brief analysis of these issues.

01 Case Introduction

In November 2021, the entry meeting for the 2021 audit of tax and non-tax revenue collection and departmental budget execution in a certain city was held. The city's audit bureau took the lead in auditing the city's tax authorities' 2021 tax and non-tax revenue collection and budget execution.

In July 2022, the city audit bureau issued the "Audit Report on the 2021 Tax and Non-Tax Revenue Collection and Departmental Budget Execution of [City] Tax Bureau" (hereinafter the "Audit Report") to the city tax bureau. The Audit Report noted that Company A in that city was suspected of underpaying refined oil products consumption tax of RMB 30 million in 2021, which was classified as a phased rectification issue with a one-year rectification period, requiring the city tax bureau to complete rectification within the specified period and report the rectification status to the city audit bureau. Upon receiving the Audit Report, the city tax bureau issued a "Work Contact Form on Refined Oil Products Consumption Tax Supervision" to the district tax bureau where Company A is located, transferring the clues regarding Company A's suspected underpayment of consumption tax as identified in the Audit Report and requiring the district tax bureau to handle the matter within a specified time limit.

In August 2022, the district tax bureau initiated an investigation and verification into Company A's suspected underpayment of consumption tax. In November 2022, the district tax bureau issued a "Tax Matters Notice" to Company A, requiring Company A to declare and pay, within a specified period, the 2021 consumption tax of RMB 30 million together with the corresponding urban maintenance and construction tax, two education surcharges, and late payment penalties. Company A, dissatisfied with this decision, filed an administrative reconsideration application with the city tax bureau in December 2022.

In February 2023, the city tax bureau upheld the district tax bureau's "Tax Matters Notice" on the grounds that Article 51 of the Audit Law stipulates that "audit decisions made by audit authorities within their statutory powers shall be executed by the auditees."

02 The Nature and Legal Effect of the Tax Underpayment Conclusion in the Audit Report

According to China's Audit Law and its Implementing Regulations, audit authorities have the power to conduct audit supervision over the collection of budgetary revenue by the departments responsible for collecting budgetary revenue at the same level, in accordance with laws, administrative regulations, and other relevant national provisions. In the case introduced above, the city audit bureau's audit of the city tax bureau's (as the budgetary revenue collection department) 2021 tax collection activities reflects its exercise of audit supervision responsibilities.

The city tax bureau cited Article 51 of the Audit Law as the principal reason for supporting the district tax bureau's tax collection, arguing that because the Audit Report issued by the city audit bureau had already identified that Company A was suspected of underpaying consumption tax of RMB 30 million, the city tax bureau and its subordinate tax authorities—as auditees—were required to execute that audit decision. The question then arises: does the relevant opinion in the Audit Report constitute an audit decision with mandatory enforcement effect? The answer is no.

Article 44 of the Audit Law provides: "After the audit team has conducted an audit of the audit matters, it shall submit the audit team's audit report to the audit authority. Before submitting the audit team's audit report to the audit authority, the opinions of the auditee shall be solicited. The auditee shall, within ten days from the date of receipt of the audit team's audit report, submit its written opinions to the audit team. The audit team shall submit the auditee's written opinions together to the audit authority." Article 45 further provides: "The audit authority shall, in accordance with procedures prescribed by the National Audit Office, deliberate on the audit team's audit report, and after jointly reviewing the opinions raised by the auditee regarding the audit team's audit report, issue the audit authority's audit report. For fiscal and financial revenue and expenditure activities that violate national provisions and should be subject to treatment or punishment according to law, the audit authority shall make audit decisions within its statutory powers; where the matter needs to be transferred to relevant competent authorities or entities for treatment or punishment, the audit authority shall transfer it according to law."

Based on these provisions, an audit report issued by an audit authority is, by nature, a conclusive evaluative document whose core function is to reflect audit findings and identify problems. Where the auditee has objections to the relevant content of the audit report, it may submit feedback during the comment solicitation stage. Therefore, the relevant conclusions of the audit report itself do not directly produce mandatory legal effects on the auditee, nor do they directly impose obligations on or deprive rights from administrative counterparts.

Unlike the conclusive evaluative content of an audit report, an audit decision is a decision made by the audit authority—based on audit results—to handle or penalize auditees' fiscal and financial revenue and expenditure activities that violate national provisions, and it carries mandatory enforcement effect. More importantly, the subject of an audit decision is ordinarily the auditee (e.g., the tax authority in the case above), not the enterprises or individuals involved in the audited matters directly. According to the Audit Law Implementing Regulations, the audit team typically first submits an audit report; where that report contains opinions on handling and penalizing the auditee's non-compliant fiscal and financial revenue and expenditure activities, the audit authority then separately issues an audit decision on handling and penalties.

Based on the foregoing analysis, the content in the Audit Report regarding Company A's underpayment of consumption tax and the requirement for the city tax bureau to complete rectification within a specified period is, by nature, merely an audit evaluation and improvement opinion—not an audit decision. It therefore carries no mandatory enforcement effect on the city tax bureau as the auditee, and carries even less mandatory binding force on Company A. Accordingly, the city tax bureau's invocation of Article 51 of the Audit Law to treat the Audit Report as an audit decision and assert that it must be unconditionally executed is clearly erroneous.

03 Must Tax Authorities "Accept Without Exception" the Rectification Opinions in Audit Reports?

With regard to audit decisions made by audit authorities, pursuant to Article 51 of the Audit Law, auditees must execute them unconditionally. If an auditee refuses to do so, the audit authority has the right to notify the relevant competent authority, which is then obligated to perform the corresponding duties on behalf of the auditee.

With regard to rectification opinions raised in audit reports, pursuant to Article 52 of the Audit Law, auditees shall fulfill their rectification obligations within the prescribed time limit and report the rectification status to the audit authority. The rectification status shall serve as an important reference for the assessment, appointment, dismissal, and reward and punishment of leading officials. Those who refuse to rectify may also be held legally liable. However, this does not mean that tax authorities must "accept without exception" all opinions in audit reports; the key is to clarify the relationship between audit opinions and tax administration.

Audit opinions issued by audit authorities are, in essence, factual evaluations of clues regarding tax violations—they do not constitute direct implementation of tax enforcement actions. The authority to administer taxes belongs exclusively to tax authorities. When implementing audit opinions, tax authorities retain the independent power to make tax assessment decisions. Therefore, audit opinions are not tax collection opinions per se, but they do constitute an important factual basis. Accordingly, upon receiving audit reports and related opinions, tax authorities shall independently fulfill the following duties in accordance with law:

(1)  Verify and confirm the facts established by the audit;

(2)  Determine the amount of taxes to be collected in accordance with tax laws and regulations;

(3)  Issue the corresponding handling documents in the name of the tax authority;

(4)  Subject themselves to review and scrutiny through legal relief procedures such as administrative reconsideration and administrative litigation.

This analysis raises a new question: since tax authorities may not simply refuse to rectify in response to audit reports, what should a tax authority do if, after initiating rectification work and investigating, inspecting, and verifying the audit opinions concerning the relevant enterprises, it discovers errors in the audit opinions—or finds, when independently applying tax law provisions, that the enterprises bear no statutory tax obligation and have not in fact underpaid taxes? Unfortunately, the Audit Law does not provide corresponding rules to resolve this question.

Article 53 of the Audit Law provides: "Where an auditee disagrees with an audit decision made by an audit authority concerning financial revenue and expenditure, it may apply for administrative reconsideration or file an administrative lawsuit in accordance with law. Where an auditee disagrees with an audit decision made by an audit authority concerning fiscal revenue and expenditure, it may request a ruling from the people's government at the same level as the audit authority, and that ruling shall be final." Under these provisions, when an audit authority issues an audit decision and an auditee disagrees, the auditee may apply for reconsideration, initiate litigation, or request a ruling. However, where the audit authority has not issued an audit decision but has only issued audit evaluations and rectification opinions, and the auditee, after its own investigation, has objections, there is effectively no available relief channel—it can only feed back its investigation conclusions and handling opinions to the audit authority for coordinated resolution. In financial management practice, coordination mechanisms between audit authorities and tax and financial authorities generally take three forms:

Joint Meeting and Routine Liaison Mechanisms: In recent years, audit authorities and tax authorities across various localities have commonly established audit-tax cooperation mechanisms. For example, some local audit authorities and tax authorities have established routine liaison mechanisms and formulated specific measures covering work contacts, information sharing, supervisory collaboration, clue transfers, result feedback, and business exchanges, specifying the forms of day-to-day liaison and communication, the scope of information to be obtained, and channels for coordination and consultation. Some localities have also established joint meeting systems, holding regular annual meetings to exchange information, share experiences, resolve problems, and discuss coordinated joint supervisory matters.

Government-Led Coordination Mechanisms: Some local governments have established coordination mechanisms for financial and accounting supervision, led by the finance department and involving multiple departments including tax and audit authorities, to jointly plan cross-departmental joint supervision and inspection, promote joint regulation by relevant government functional departments, and build efficient, well-coordinated, and orderly working mechanisms. Such mechanisms can also provide a coordination platform for resolving differences of opinion between audit authorities and tax authorities.

Working Task Forces and Special Coordination: When dealing with major or complex issues, audit authorities and tax authorities may also coordinate through the establishment of joint working task forces. For example, when rectifying the illegal refund of tax revenue, the Ministry of Finance and the State Taxation Administration have jointly established working task forces and developed collaborative working mechanisms. Such special coordination mechanisms are equally applicable to resolving major differences of opinion between audit authorities and tax authorities.

04 How Should Enterprises Properly Guard Against Similar Audit Risks?

Although audit reports issued by audit authorities are not mandatory in nature, the clues regarding enterprises' tax violations raised in audit reports—as well as the rectification opinions directed at tax authorities with specified time limits—still carry a certain degree of legal effect: tax authorities must initiate rectification work and investigate and verify the relevant violation clues. Therefore, once an audit authority issues audit opinions unfavorable to an enterprise, the enterprise's tax disputes will inevitably become prominent and its tax compliance risks will increase sharply. This is particularly true in the field of refined oil products consumption tax administration: as the state continuously strengthens tax supervision in this area, tax authorities often—under pressure from audits and enforcement risks—accept audit opinions without question.

Faced with increasingly intensified audit supervision and tax inspection pressure, enterprises engaged in refined oil products consumption tax-related activities should neither passively wait and accept unfavorable outcomes, nor adopt confrontational measures in an attempt to evade audit supervision. When audit authorities conduct extended audits or audit investigations of an enterprise, although the enterprise is not the auditee, it is still the subject of investigation and continues to enjoy corresponding procedural rights—such as the right to make statements and raise defenses—and should respond actively and rationally. During the audit investigation process, an enterprise may truthfully state the facts regarding questions raised by audit personnel and provide its own explanations and clarifications on issues identified by the audit. During the period when the audit team solicits opinions from the tax authority, the enterprise may proactively inform the tax authority of the relevant circumstances and provide evidence, encouraging the tax authority to incorporate the enterprise's reasonable claims when submitting feedback to the audit team. In practice, some tax authorities, upon receiving the draft audit report for comment, will communicate with and verify specific issues involving the enterprise. Enterprises should seize this window of opportunity, actively communicate and cooperate with the tax authority, and assist the tax authority in gaining a comprehensive understanding of the factual circumstances.