Editor's Note: Where a tax inspection is expected to result in an administrative penalty, the party concerned is legally entitled to state its case, defend itself, and request a hearing; for a tax treatment decision recovering taxes, however, current rules establish no hearing procedure, and there is no clear procedural arrangement for how the taxpayer's opinions are to be heard before the decision is made. In the Ningbo Yitai case retried by the Zhejiang High People's Court, the treatment decision at issue recovered export tax refunds of more than RMB 25.61 million, and the focus of the dispute was precisely whether the Inspection Bureau had safeguarded the company's right to state its case and defend itself. Taking this case as a point of departure, and drawing on a land appreciation tax case published by the Guizhou High People's Court, this article analyzes the requirements for safeguarding the right to state and defend in tax treatment cases and the necessity of introducing a hearing procedure, with a view to providing a reference for relevant market participants.

01 The Cases

In case (2020) Zhe Xing Zai No. 6 before the Zhejiang High People's Court, Ningbo Yitai Holding Group Co., Ltd. successively entered into two Entrusted Export Agency Agreements and 119 Industrial and Mining Products Purchase and Sale Contracts with an electronic components company in Linhai City between 2010 and 2012, and after the goods were exported applied for and obtained export tax refunds of RMB 25.6154 million. On February 21, 2014, the Third Inspection Bureau of the former Ningbo Municipal State Taxation Bureau made a tax treatment decision finding that the company had engaged in "genuine agency, sham purchase and sale," and, pursuant to Guo Shui Fa [2006] No. 24, recovered the above refunds; that decision was served by leaving it at the company's premises on November 28 of the same year. On September 24, 2015, the Inspection Bureau compulsorily deducted the tax from the company's bank account and paid it into the treasury. The company applied for administrative reconsideration, the reconsideration authority upheld the original decision, and the company then brought suit.

In the litigation, the Inspection Bureau argued that recovering export tax refunds was a tax treatment rather than an administrative penalty, that the law had established no hearing procedure for it, and that no hearing was therefore required. The court of first instance held that recovering more than RMB 25.61 million in refunds had a major impact on the company's rights and interests, and that the Inspection Bureau, before making the decision, had not held a hearing on account of that impact on major interests and had not adequately safeguarded the company's right to state its case and defend itself, in violation of the principle of due process; it revoked the treatment decision and the reconsideration decision. The court of second instance, by contrast, held that no law directly required a hearing procedure in this case, that the company had afterwards communicated with the tax authority on many occasions through the local commerce department and other channels, and that the treatment decision had been served only nine months later, which "also gave Yitai sufficient time to express its opinions"; finding that the substantive right to state and defend had been safeguarded, it reversed the judgment and upheld the decision. On retrial, the Zhejiang High People's Court held that the working papers and other materials on which the Inspection Bureau relied to prove that it had informed the company of its right to state and defend had not been submitted during reconsideration or at first instance and could not serve as evidence that the administrative act was lawful; that all coordination and communication among the parties had taken place after the treatment decision was made, at which point the company "was objectively no longer able to state its case or defend itself, and even if it expressed opinions, they would have no effect whatsoever on the outcome of the tax treatment decision under challenge"; and that service of the treatment decision nine months after it was made was a clear procedural violation. On that basis, the retrial judgment set aside the second-instance judgment and reinstated the first-instance judgment.

Coincidentally, case (2025) Qian Xing Zai No. 6 before the Guizhou High People's Court involves the same issue. In March 2023, the Second Tax Branch of a county tax bureau, after reviewing the land appreciation tax liquidation materials of a real estate development company, sent the company a notice of exchange of review opinions; the company made its statement, and the branch gave a reply. In April of the same year, the branch issued a tax matters notice which, calculating saleable floor area on the basis of the exclusive area of the underground parking spaces (excluding shared common area), assessed additional land appreciation tax of RMB 21.8565 million. After the notice was upheld on reconsideration, the company brought suit but was unsuccessful at both first and second instance. On retrial, the Guizhou High People's Court held that where the tax authority knew that calculating deductible items on the basis of exclusive area was improper and would cause a major adverse impact on the taxpayer, it should have given the taxpayer an opportunity to supplement relevant materials and to request the competent authority to make a further determination of the parking space area; making the determination directly was clearly improper. The court revoked the tax matters notice and the reconsideration decision and ordered that a new tax treatment be made.

The two cases involve different taxes and different points of dispute, but both point to the same question, namely how a tax authority should hear the taxpayer's opinions before making a major adverse decision. Specifically, first, in tax treatment cases for which the law provides no hearing, does the tax authority nonetheless bear an obligation of procedural protection; and second, to what degree must the right to state and defend be safeguarded before it is adequate.

02 The Absence of a Statutory Hearing Does Not Relieve the Tax Authority of Its Obligation of Procedural Protection

Under current rules, the hearing procedure applies mainly to administrative penalties. Article 63 of the Administrative Penalty Law provides that for relatively severe administrative penalties such as fines of a relatively large amount or confiscation of illegal gains of a relatively large amount, the party may request a hearing; Article 39 of the Provisions on the Procedures for Handling Tax Inspection Cases likewise requires the Inspection Bureau to inform the party of its rights to state its case, defend itself, and request a hearing only when it intends to impose a tax administrative penalty, and makes no corresponding provision for tax treatment decisions. It was on this basis that the Inspection Bureau in the Ningbo Yitai case framed its defense. Yet the absence of a statutory hearing does not mean that the tax authority is free of procedural constraints when making a treatment decision.

First, the right to state and defend is not limited to administrative penalties. Article 8, paragraph 4 of the Tax Collection Administration Law provides that "taxpayers and withholding agents have the right to state their case and the right to defend themselves with respect to decisions made by tax authorities." The "decisions" referred to in that paragraph are not confined to administrative penalty decisions, and tax treatment decisions are naturally included. Stating one's case and defending oneself further presuppose knowledge: only when taxpayers know the facts the tax authority intends to find, the basis it relies on, and the treatment it intends to impose can they raise targeted opinions. The tax authority therefore bears a statutory obligation, before making a treatment decision, to give prior notice and to hear the taxpayer's opinions, and that obligation is not removed by the absence of a hearing procedure.

Second, application of the principle of due process does not presuppose express statutory provision. In Liu Yanwen v. the Academic Degree Evaluation Committee of Peking University, (1999) Hai Xing Chu Zi No. 103, the defendant argued that when the decision was made no law or regulation required that notice be served, so there was no violation of statutory procedure. The Haidian District People's Court of Beijing rejected this argument, holding that a decision not to confer a degree concerns the degree applicant's right to obtain a degree certificate, that "before making a negative resolution, the university's degree committee should inform the degree applicant and hear the applicant's defense," and that after making the decision it should serve the decision on the applicant or announce it to him; on the grounds that the defense had not been heard before the decision was made and that the decision had not actually been served afterwards, thereby affecting the party's exercise of the rights to appeal and to sue, the court revoked the decision. In its retrial judgment in the Ningbo Yitai case, the Zhejiang High People's Court likewise made clear that "before an administrative authority makes an administrative treatment decision adverse to the administrative counterparty, it should, in accordance with the requirements of the principle of due process, give prior notice to the counterparty and hear the counterparty's statements and defenses, so as to fully safeguard the lawful rights and interests of the administrative counterparty."

Third, the intensity of procedural protection should be commensurate with the degree of impact of the decision. This is reflected in both judgments: in the Ningbo Yitai case, the Zhejiang High People's Court stressed that the treatment decision at issue "clearly had a major adverse impact on Yitai's rights and interests," and the Guizhou High People's Court likewise treated a "major adverse impact on the taxpayer" as the precondition for the tax authority's duty to give the taxpayer an opportunity to supplement materials. As to the degree of impact, although recovering taxes is not an administrative penalty, it likewise directly diminishes the taxpayer's property, and where the taxpayer fails to pay within the time limit the tax authority may further enforce payment in accordance with the law. A fine of a relatively large amount may still be met with a request for a hearing, yet a treatment decision recovering tens of millions of yuan in taxes leaves no hearing to apply for; procedural protection is thus clearly out of balance with the impact of the decision.

On the basis of the above analysis, in tax treatment cases involving relatively large amounts recovered, prominent factual disputes, and a major adverse impact on the taxpayer's rights and interests, taxpayers have ample grounds to apply for a hearing before the treatment decision is made. Although current rules do not establish a hearing procedure at the treatment stage, neither do they prohibit one; an Inspection Bureau that organizes a hearing upon application both meets the requirements of the principle of due process and faces no normative obstacle.

03 Substantive Requirements for Safeguarding the Right to State and Defend in Tax Treatment

With the obligation of procedural protection established, the ensuing question is the degree of that protection. In the Ningbo Yitai case, the Inspection Bureau claimed that it had informed the company of its right to state and defend in the interview record, that it had noted in its working papers that "if there is any objection, a truthful defense should be made," and that the company had submitted three written explanations; in the Guizhou case, the tax authority sent a notice of exchange of opinions and replied to the company's statement. Although both cases contained steps for hearing opinions, the courts in both found that the taxpayer's rights had not been adequately safeguarded. Read against the two judgments, safeguarding the right to state and defend should at a minimum satisfy the following requirements.

First, opinions must be heard before the decision is made. The significance of stating and defending lies in enabling the taxpayer's opinions to influence a decision not yet made. In the Ningbo Yitai case, the treatment decision was made on February 21, 2014, while the company only began to express its opinions through the commerce department and other channels in March of that year, all after the decision had been made. The second-instance court treated the nine-month interval before service as time for the company to express its opinions, whereas the retrial court made clear that opinions at that point would have no effect whatsoever on the outcome. Once a decision has been made, subsequent communication, however long it continues, cannot substitute for hearing the taxpayer beforehand.

Second, the content of the notice must be specific, and the process of hearing opinions must be verifiable from the record. A general notice such as "if there is any objection, a truthful defense should be made" does not set out the facts to be found, the basis relied on, or the decision to be made, leaving the taxpayer unable to raise targeted opinions on that footing. At the same time, whether the tax authority has performed its obligations to notify and to hear should be proven by materials contemporaneously created in the case file. In the Ningbo Yitai case, the Inspection Bureau did not submit the relevant working papers until the second instance, and the court lawfully declined to accept them, which shows that performance of procedural obligations cannot be proven by materials supplemented after the fact.

Third, the taxpayer must participate effectively in the finding of facts. In the key points of its judgment, the Guizhou High People's Court stated that the principle of due process "requires that a party about to be adversely affected by an administrative decision participate fully and effectively in the process of making that decision, so as to play a positive role in its outcome." In that case the taxpayer had made a statement, the tax authority had replied, and the reconsideration authority had even written on its own initiative to the natural resources department to inquire into the situation—steps the court acknowledged—yet the court still held that the tax authority should have given the taxpayer an opportunity to supplement materials and to request the competent authority to make a determination. Evidently, hearing opinions is not completed merely by going through the formal steps of statement and reply, and the tax authority's investigation on its own authority cannot substitute for the taxpayer's participation in the procedure.

These requirements have been established gradually by the courts in individual cases, whereas in inspection practice whether notice is specific and whether the hearing of opinions is effective depends largely on how the case handlers proceed. A hearing can precisely make up for this deficiency: it is held before the decision is made; the Inspection Bureau must explain in person the facts it intends to find, the evidence it relies on, and the rules it applies; the taxpayer may raise cross-examination opinions on the source, the method of collection, and the probative value of the evidence; the two sides debate the disputed issues; and the hearing transcript is signed and confirmed by both parties. In other words, the protections the courts required for the right to state and defend in these two cases are precisely the core content of a hearing procedure.

04 The Absence of a Hearing Procedure Aggravates the Taxpayer's Predicament in Obtaining Remedies

The value of a hearing lies not only in providing the taxpayer an opportunity to present opinions, but more importantly in subjecting the evidence on which the tax authority bases its decision to scrutiny. Inspection proceedings are led by the tax authority, and the taxpayer's participation is very limited in such steps as obtaining account books, preparing interview records, and collecting evidence from third parties. If there is no opportunity to cross-examine the evidence before the decision is made, it is difficult to test whether the evidence was lawfully sourced, whether it was collected in a proper manner, and whether the pieces of evidence corroborate one another, and problems such as unlawful or selective evidence-gathering are likewise difficult to detect and correct in time.

This problem is all the more acute under the current remedy system. Article 88, paragraph 1 of the Tax Collection Administration Law provides that when a taxpayer has a dispute with the tax authority over tax payment, it must first pay or remit the tax and late-payment surcharges in accordance with the tax decision, or provide corresponding security, before it may apply for administrative reconsideration in accordance with the law; and only if dissatisfied with the reconsideration decision may it bring suit. Imagine the following situation: before the decision is made, the taxpayer cannot apply for a hearing and its opinions are not substantively heard; after the decision is made, the amount of tax found is enormous, and the taxpayer can neither pay it nor provide security, so the channels of reconsideration and litigation close accordingly. In this way, from inspection and characterization through to enforcement, the tax authority alone controls the evidence and makes the judgment throughout, with outsiders having no way of knowing and no way of overseeing; a major tax case comes close to being a "secret case," and the taxpayer has nowhere to seek redress. It is precisely for this reason that a prior hearing is the only procedural opportunity for a taxpayer to cross-examine the tax authority face to face without first paying the disputed tax.

Even where taxpayers are able to enter reconsideration and litigation, the absence of a prior hearing merely defers the dispute. In the Ningbo Yitai case, six years elapsed from the making of the treatment decision to the retrial judgment, and the case ultimately returned to the procedural question itself. By comparison, the cost of organizing a hearing is very limited: Article 47 of the Provisions on the Procedures for Handling Tax Inspection Cases already makes clear that the time spent organizing a hearing is not counted toward the case-handling time limit; and because the hearing transcript is signed and confirmed by both parties, the processes of notification, statement, and cross-examination are verifiable from the record, which is likewise of positive significance for standardizing tax enforcement.

Conclusion: On August 31, 2026, the executive meeting of the State Council discussed and approved in principle the Tax Collection Administration Law (Draft Revision), and the revision of that law will inevitably drive amendments to the Provisions on the Procedures for Handling Tax Inspection Cases and other supporting regulations. The author recommends taking this opportunity to add a hearing clause to the Provisions on the Procedures for Handling Tax Inspection Cases, making clear that where the Inspection Bureau intends to make a tax treatment decision having a major impact on the rights and interests of the inspected party, it shall give prior notice of the facts it intends to find, the reasons, the basis, and the content of the treatment, and shall inform the party of its rights to state its case, defend itself, and request a hearing; where the party applies for a hearing, the Inspection Bureau shall organize one, and the specific procedures may be carried out with reference to the provisions on hearings for tax administrative penalties. Before the relevant rules are improved, taxpayers facing a major tax treatment should, before the decision is made, submit written statements and defenses to the Inspection Bureau and retain proof thereof, and should apply for a hearing on their own initiative in major and complex cases; where the tax authority makes a major adverse decision without notice and without hearing opinions, they may assert procedural illegality through administrative reconsideration and administrative litigation in accordance with the law, and where necessary seek the support of professional tax lawyers, so as effectively to safeguard their own lawful rights and interests.