The Corporate Social Credit System (SCS) is the Chinese Government’s comprehensive vision of using advanced technologies to monitor and steer market participants. The plan was outlined first in 2014 and has been progressively implemented since then. The deadline for final implementation will be in 2020, but it is likely that the SCS will continue to evolve further in the following years.

According to the SCS, all market participants, both foreign and Chinese firms, must comply with a series of regulations and will be ranked accordingly, using a “trustworthiness” scale. The rank of the company will lead to a series of benefits or penalties.

The taxation field is one of the most advanced and earliest ratings of the Corporate SCS. The relevant rating stipulation was published in 2014 and has been applied since 2015. Companies are ranked using a scale from A to D, with every letter category referring to a fixed range of points that can be achieved. In addition, another level identified with the letter M is added, which is given to newly established companies. The ranking scale is broken down as per the following:

·         Category A: A score above 90 points.

·         Category B: A score between 70 and 90 points.

·         Category M: New enterprises, or enterprises that have no income during the year and have an annual evaluation of 70 or more points.

·         Category C: A score between 40 and 70 points.

·         Category D: A score below 40 points, or companies that have committed tax fraud.

The government has an incentive structure for companies to comply with the relevant regulations:

·         Category A. The company can enjoy the following benefits:

o    Be publicly listed as an A-rated entity.

o    Three months of VAT special invoices can be received in one occasion.

o    After 3 years, the company will be issued preferential support from the tax bureau and even dedicated personnel.

·         Category B. Tax authorities shall provide timely guidance on taxation policies and management regulations.

·         Category M. In this category there are no specific incentives or punishments, as the company is in the phase of building its reputation.

·         Category C. For taxpayers whose tax credit rating is C, the tax authorities shall strictly manage their activity according to law, and selectively adopt the management measures of Article 32 of the “Measures for the Administration of Tax Credits (Trial)“ issued in 2014, depending on the trend of credit evaluation status.

·         Category D. The tax authorities shall take the following measures:

o    Publicly disclose the information of companies in this category and their legal representatives.

o    If the company wants to issue VAT special invoices it must follow a more treacherous procedure, there is also a limit for ordinary invoices that can be issued.

o    Export tax rebate audit is strengthened.

o    Tax assessments are strengthened, and there is a more rigorous examination of the data submitted by the company.

Therefore, different categorizations will have significant consequences for a company. Furthermore, it must be taken into consideration that under the Corporate SCS, if a company is rated as a distrusted taxpayer, this can potentially impact a company’s license approval, land usage rights and the travel options of its legal representatives, among others. This practice further outlines the principle of joint sanctions, by which a company that does not comply to regulations within a field (for example taxation) will also be subject to penalties in other fields.