Editor's Note: In Judgment (2026) Xin 01 Xing Zhong No. 73, the Urumqi Intermediate People's Court shifted the starting point for calculating late payment surcharges from the date on which the tax payment became overdue to the day following the issuance of the tax handling decision, on the grounds that the taxpayer had no subjective fault and that the tax authority's audit procedure had exceeded the statutory time limit. Where a taxpayer fails to file tax returns due to a misinterpretation of tax policies, should the late payment surcharge be calculated from the day following the expiry of the tax payment deadline, or from the day following the issuance of the tax handling decision? This directly affects the amount of late payment surcharge. This article intends to analyze and explore the above issues in light of this case.

I. Case Introduction

In April to June 2015, the enterprise involved in the case reduced its holdings of shares in a listed company and derived income therefrom. According to the "Interim Measures of the Xinjiang Uygur Autonomous Region on Promoting the Development of Equity Investment Enterprises," "the equity investment income and equity transfer income derived by equity investment enterprises, as well as the income from partners' transfer of equity, shall be exempt from business tax in accordance with the law." The enterprise took the position that, as an equity investment enterprise that had been filed and recorded with the Financial Work Office, it was eligible for the aforementioned tax preferential policy. As the income derived from reducing its shareholdings constituted equity transfer income, no business tax was payable. Accordingly, it did not file or pay business tax on the income from the shareholding reduction.

In April 2018, the competent tax authority served a "Tax Inspection Notice" upon the enterprise. The tax authority did not formally issue the "Tax Handling Decision" until August 2023, determining that the enterprise should have paid business tax and surcharges on the shareholding reduction, and calculated late payment surcharges on the tax, with the surcharges calculated from the day following the expiry of the tax payment deadline. The enterprise disagreed and applied for administrative reconsideration, requesting the revocation of the "Tax Handling Decision." The reconsideration authority upheld the decision. The enterprise remained dissatisfied and filed a lawsuit with the court.

With respect to the late payment surcharges, the enterprise argued that: first, this case arose from a misinterpretation of tax policies and it had no subjective intent; and second, the tax authority initiated the inspection in April 2018 but did not issue its decision until August 2023, which constituted a serious procedural delay and caused the late payment surcharges to accrue continuously. Where a decision was not rendered within a reasonable statutory period due to the tax authority's own fault, it was clearly improper to shift to the enterprise the consequences of the tax inspection bureau's serious procedural violation.

The tax authority argued that the late payment surcharge is strictly statutory, ancillary, and compensatory in nature. It attaches to the fact of overdue tax itself and constitutes a form of compensation payable by the taxpayer or withholding agent for occupying state tax funds. The calculation standard (0.05% per day of the overdue tax) and the starting and ending time points are all directly specified by laws and administrative regulations. The tax authority has no discretion to adjust or modify the calculation of late payment surcharges and is merely required to calculate them strictly in accordance with the statutory standards and time nodes.

The court held that the late payment surcharge is essentially an economic measure of a disciplinary nature, and an actor should only be subject to punishment where subjective fault exists. "No punishment without fault" and "punishment commensurate with fault" are the core tenets of legal liability attribution. Accordingly, the court modified the surcharge portion of the decision, changing the basis from "a late payment surcharge of 0.05% per day shall be imposed from the date the tax payment became overdue" to "a late payment surcharge of 0.05% per day shall be imposed from the day following the date of issuance of the tax handling decision."

II. The Starting Time of Late Payment Surcharge Is Statutory — Is There Any Room for Adjustment?

(I) Legal Provisions on the Late Payment Surcharge and Its Starting Time

Article 32 of the Tax Collection and Administration Law stipulates: "Where a taxpayer fails to pay tax within the prescribed time limit, or a withholding agent fails to remit the withheld tax within the prescribed time limit, the tax authority shall, in addition to ordering the taxpayer or withholding agent to pay the tax within a specified period, impose a late payment surcharge at a rate of 0.05% per day on the overdue tax from the date the tax payment became overdue." Article 75 of the Implementing Regulations of the Tax Collection and Administration Law further clarifies that "the starting-cross time period for the imposition of the late payment surcharge prescribed in Article 32 shall predominate formula prescribed, namely: the period shall run from the day following the expiry of the tax payment period prescribed by laws, administrative regulations, or determined by the tax authority in accordance with laws and administrative regulations, until the date the taxpayer or withholding agent actually pays or withholds the relevant tax."

In accordance with the above provisions, the surcharge for overdue tax payment and the time from which to calculate the surcharge are strictly stipulatory. That is why, in this case, the tax authority determined that, since the enterprise failed to pay the business tax within the statutory filing period, the surcharge calculation from the day following the statutory payment deadline is a direct application of the provisions of the law, leaving no room for adjustment.

(II) Why the Court Adjusted the Trigger Date of the Late Payment Surcharge

1. The Court Confirmed the Law’s Punitive Character

Article 32 of the Tax Collection and Administration Law sets the daily rate at 0.05% of the overdue tax amount. The cumulative annual interest is approximately 18.25%, which far exceeds the contemporaneous cost of capital use.The court in this case has determined that the tax late payment surcharge is a punitive and effective measure. When a taxpayer delays payment, the tax authority charges an additional sum based on the overdue amount and the period of delay, with a legally fixed rate, aiming to compel the taxpayer to make timely payment. Therefore, the suggestion of the surcharge must be decided based on the responsibility for any delay and all the necessary conditions of the specific case.

2.Application of the Principle of Proportionality of Punishment and Offense in the Analysis

The starting point for calculating the late payment surcharge is not absolutely fixed; the taxpayer's subjective fault should be taken into account. The Administrative Punishment Law, as the fundamental law governing administrative punishment, serves a leading and overarching role for administrative punishment activities in all fields, and the tax administrative field is no exception.

On the surface, the starting time for calculating the late payment surcharge prescribed by the Tax Collection and Administration Law and its implementing regulations is clear and constitutes a statutory method of calculation. However, if the company in this case bears no subjective fault, then at a deeper level, adjusting the starting point in accordance with the Administrative Punishment Law is precisely a distinct manifestation of implementing the principle of "punishment commensurate with the offense" in the tax field. In essence, this adjustment is a correct understanding and application of the rules on the starting point for late payment surcharge under the tax collection laws, within the overarching framework of the fundamental law on administrative punishment. Therefore, when the authority adjusts the starting point after ascertaining that the taxpayer bears no subjective fault, it has not departed from the statutory rules on the starting point for late payment surcharge under the tax collection laws; rather, it is an accurate application of the statutory rules within the framework of the Administrative Punishment Law. In other words, adjusting the starting point of the late payment surcharge does not "break" its statutory nature, but rather returns to the original meaning of that statutory nature under the guidance of higher-level legal principles.

This case, together with the judgment of the Nantong Intermediate People's Court of Jiangsu Province in (2024) Su 06 Xing Zhong No. 522, introduced a distinct judicial reasoning, namely that the recovery of tax and the imposition of a late payment surcharge are two separate concepts, and the failure to pay tax does not necessarily give rise to an obligation to have the late payment surcharge assessed. The point at which a tax payment becomes overdue is a question of fact, whereas the point from which the taxpayer should bear the late payment surcharge is a question of allocation of responsibility. In addressing the allocation of responsibility, both cases pointed out that the late payment surcharge has a punitive nature, and its imposition should be premised on the existence of subjective fault on the part of the taxpayer. Where the tax authority itself has committed procedural violations or failed to perform its duties, the resulting expansion of the late payment surcharge should not be shifted onto a faultless taxpayer. This judicial direction introduces the principle of proportionality of punishment and offense into the framework for determining the starting point of the late payment surcharge.

III. How to Determine Whether a Taxpayer Has Subjective Fault?

In determining subjective fault, the misinterpretation of tax policies and long-term reliance on the tax authority are key considerations for finding that the taxpayer lacked wrongful intent.

(I) Can Misinterpretation of Tax Policies Be Regarded as Absence of Subjective Fault?

The current tax law provisions do not explicitly stipulate the element of subjective intent. Taking tax evasion under Article 63 of the Tax Collection and Administration Law as an example, it does not directly state that a taxpayer constitutes tax evasion only where he intentionally commits the act. Instead, subjective intent is internalized within expressions such as "forging, altering, concealing, or unauthorizedly destroying account books or vouchers" and "refusing to file a tax return." The Notice of the State Administration of Taxation on Further Improving the Work Related to the Investigation and Handling of Tax Violation Cases (Shui Zong Fa [2017] No. 30) explicitly provides that "where a taxpayer, without adopting deceptive or concealment measures, fails to pay or underpays tax merely due to errors such as inaccurate understanding of tax policies or calculation mistakes, such conduct shall not be characterized as tax evasion." It can thus be seen that, at the level of the State Administration of Taxation's regulatory documents, misinterpretation of tax policies is clearly distinguished from subjective fault conduct such as intentional deception or concealment.

(II) Can Long-Term Reliance on the Tax Authority Be Regarded as Absence of Subjective Fault?

In the legal relationship of tax collection and administration, the tax authority and the taxpayer stand in a relationship of administration and being administered, and the taxpayer objectively bears a natural sense of trust in and deference to the tax authority. Meanwhile, a sound tax collection relationship is built upon the taxpayer's reasonable reliance on the tax authority's law enforcement conduct. Where the taxpayer's tax filings have been open and routine, and the competent tax authority has not raised any objection or provided any correction over a relatively long period, the reasonable reliance arising therefrom should be protected.

At the same time, no one should shift his own fault onto others, and public authorities should be all the more willing to bear responsibility for their own faults. Article 38 of the Implementing Regulations of the Tax Collection and Administration Law provides that "the tax authority shall strengthen the administration of tax collection and establish and improve the responsibility system," indicating that the tax authority bears an unshirkable supervisory duty as to whether taxpayers pay taxes in accordance with the law. Furthermore, Article 47 of the Procedural Regulations for Tax Inspection Case Handling (Order No. 52 of the State Administration of Taxation) provides that "the inspection bureau shall make an administrative handling decision, an administrative penalty decision, or a conclusion of no tax violation within 90 days from the date of case filing. Where the case is complex and an extension is needed, with the approval of the director of the tax authority, the extension may not exceed 90 days; where further extension is needed due to special circumstances or force majeure, the approval of the deputy director in charge of the tax authority at the next higher level shall be obtained, and a reasonable extension period shall be determined." The tax authority is thus subject to clear time limits for lawfully issuing handling decisions. Where the tax authority's inspection procedure seriously exceeds the statutory time limit, there is a direct causal relationship between the expansion of late payment surcharges and the tax authority's own failure to perform its duties. In such circumstances, the tax authority should not shift the late payment surcharges caused by its own fault onto a taxpayer who bears no subjective fault.

IV. Conclusion

Taking into account whether the taxpayer has subjective intent in determining the starting point for calculating late payment surcharges is a concrete manifestation of protecting the taxpayer's lawful rights and interests. The late payment surcharge on tax is not equivalent to the tax itself; its punitive nature determines that its imposition should be premised on the taxpayer's subjective fault. The tax authority should also actively bear corresponding responsibility. The judgment in this case examined not only the taxpayer's conduct but also the conduct of the tax authority. Since the company's tax filings had not received any objection from the tax authority for a long period, a basis for reasonable reliance had objectively been established. The tax authority should appropriately show tolerance for the consequences — such as the underpayment of tax — arising from such reliance.