China Legal Compliance, Blacklisting and Corporate rating
The People`s Republic of China celebrated her 70 years birthday in October 2019, and even though the business environment faces challenges in China, foreign direct investment (FDI) investment according to Ministry of Commerce (MOFCOM) data rose 2.9% year on year.
However, a number of tech companies from the U.S., Germany and Japan operating in China are keen to cut back on production in China, citing the slowdown of the Chinese economy, on-going trade dispute and complex legal and tax regulations as major reasons.
China is introducing more control to economy at National level and in conjuction with the centralization drive, the country has introduced a new social credit system to Chinese and this social credit system will be on applicate to Foreign Invested Companies as well.
The following explains key aspect of the system which raises worries among foreign businesses operating and aiming to China:
Chinese Corporate Social Credit System – cscs for foreign investors
China has introduced plans to enact Social Credit System (SCS) applicable to her 1.3 billion citizens, however, forthcoming credit system will be also introduced to the 33 million company strong Chinese commercial, industrial and business sectors. Foreign Invested Companies are not immune to the
SCS which system for corporations are referred as “Corporate Social Credit System”.
Currently, in China it is relatively easy to conduct Company Searches to inspect and find details of incorporated companies giving access to basic registered details at the China Company Registry but the planned new system will go much deeper in enterprise characteristics.
The State Council has made instructions to establish three additional elements based on which the companies will be classified. Such classifications will include credit profiles, credit report mechanism and credit ratings in China. The following provides information of such classifications and what Foreign Invested Companies should know about these forthcoming regulations:
National Social Credit Code
In China, at the moment companies are rated by National Enterprise Credit Information Publicity System and Credit China website which is publicly available and provides such information as whether a company has good or bad social credit.
Most of this data is collected on companies under the name of uniform social credit code, and reportedly this data will be incorporated into new CSCS system including information from company own reporting sources and a variety of government inspections such as Legal Compliance of environmental regulations, environmental impact studies and emission standards relevant to specific industry rules and regulations.
Foreign Invested Companies will be subjects of such data collection and investigated for misconduct and the findings will be recorded in the credit information system. However, at the moment no details have been made available how foreign companies will be evaluated and how companies shall behave to maintain their Good Standing in China with healthy CSCS scores.
Rating System and Comprehensive Evaluation
According to the information releases, companies in China will be assigned one of four ratings at the national-level –
excellent, good, medium and poor – which ratings will be further defined by industry administrators and local governments.
It is estimated that with these ratings, a comprehensive evaluation of a company will be made under a standardized algorithm system in accordance with the PRC Social Credit Law.
Importance of Legal Compliance, Blacklisting and Tax Credit Restoration
China has in place a variety of blacklist classification for non-compliance with Chinese laws and regulations which can be inspected by anyone online.
Blacklisted companies will have stricter regulatory inspections, less business opportunities as somehow characterized as dishonest entities and limited access to government tenders.
Blacklist administrators will set specific conditions for removal from the blacklist making it very important for companies to avoid being blacklisted. Companies entered in the blacklist are typically given time limits to correct their unwanted behaviour and are required to go through a series of reporting and to participate in special training and events.
The State Tax Authority of China has introduced new Measures for Tax Credit Restoration as of January 1st 2020 which are to be used when taxpayers are proactively seeking to restore their tax ratings, correct irregularities and to restore their Legal Compliance and Good Standing records.
Corporate taxpayers are able to apply for tax credit restoration based on a few conditions including the Enterprise in question has completed all tax declarations, tax payments and filings; has paid all payments due before payment deadline and that all other Legal Compliance and Regulatory issues have been fulfilled.
The road ahead?
It is too early to say how foreign businesses in China will be affected by these inspection policies and possible sudden enforcement of CSCS regulations that were previously ignored at least at the local level.
However, prudent companies are most likely required to conduct reviews to identify how they may be affected by the government’s policy priorities and how they can cope probably with the stringest regulatory enforcement in the World.
Many companies are worried about data privacy since information is missing on how collected vast amount of data might be shared between different government departments, how collected data will be protected from misuse and how to protect themselves from misleading data released to public.
Foreign companies are well advised to keep their Tax Credit Rating in order to have smooth dealing with National and local tax authorities and to avoid bad tax credit ratings at CSCS system, since the ratings may affect how they conduct business with other enterprises in China.
China Railway construction corporation, state-owned company punished
Foreign Invested Companies worry about Equal Treatment with Chinese Companies under corporate social credit system, however, a recent case with China Railway Construction Corporation shows that corporate social credit system is also applicable to bad behaviour of big state-owned companies.
China Railway Construction Corporation has been constructing a massive USD
28.5 billion railway line from Inner Mongolia to Jiangxi province which reportedly was an example of “safe production” with no injuries or deaths, however, this was a cover-up by the management of this State-run company.
Local reporters were able to show both deaths and injuries which led to managers to be punished and the subsidiary in question to be blacklisted for a year, subject to massive inspections, bans on bidding for other public projects and issuing bonds and shares.
Consequently, Black Mark was fed into China Corporate Social Credit System on China Railway Construction Corporation.