Many official letters exchanged between administrative authorities are used as a basis for imposing penalties, and a ruling notice from a tax authority may contain a statement that the following decision was made based on an official letter from an administrative authority. Is it appropriate for a tax authority to determine a penalty directly based on an official letter and is revocation possible?
Company A was recognised as a high-tech enterprise both in 2010 and 2013, enjoying the associated tax benefits for several years. In 2019, the local audit department sent a letter to the tax authority stating that, “Company A is not qualified as a high-tech enterprise because of irregularities in the application process”.
In the same year, the local tax authority issued a Notice of Order for Rectification pursuant to this official letter, requiring Company A to rectify its tax returns and other related matters within a certain period of time, as well as to bear the risk of facing the recovery of tax benefits worth hundreds of millions of renminbi. We represented Company A in filing an administrative reconsideration, giving the following reasons.
- The qualification of high-tech enterprise had not been legally revoked. The qualification of high-tech enterprise obtained by Company A in 2010 and 2013 is legally valid and had not been revoked in accordance with the law.
- Without statutory procedures. Even if Company A does not meet the qualifications for high-tech enterprises – which should first be re-examined by the high-tech enterprise certifying authority by law – article 16 of the Administrative Measures for the Determination of High and New Technology Enterprises stipulates that, “If a certificated high-tech enterprise is found not to meet the qualification by the relevant department during the daily management process, it shall be requested to be re-examined by the certifying organ. After the review, if its failure to meet the qualification is determined, the certifying organ shall disqualify it and notify the tax authority to recover the tax benefits it has enjoyed since the year it become unqualified.” Therefore, it is illegal for the tax authority to pursue the recovery of tax benefits directly on its own.
- Beyond the authority of the audit office. The audit office does not have the authority to identify and revoke the qualification of high-tech enterprises, which should be reviewed and determined by the leading group for the determination and administration of high and new-technology enterprises in accordance with the law, and any disqualification should also be reviewed and determined by this group. The audit department is not the leading group, having no authority to determine whether Company A is qualified as a high-tech enterprise or not.
- Company A’s right and opportunity for remedy was not guaranteed. Company A had never received any notice or decision to terminate or revoke the qualification of high-tech enterprise, even if the company does have circumstances that may lead to the termination or revocation of its qualification. However, according to articles 31 and 32 of the Administrative Penalties Law, before making an administrative penalty decision, the administrative authority shall inform the party concerned of the facts, reasons and basis for such decision, and the party concerned shall have the right of statement and defence. With regard to the administrative penalty of disqualification, according to article 42 of the Administrative Penalties Law, the party concerned has the right to request a hearing.
The case was determined after a hearing by the administrative authority. The internal working official letter received by the administrative authority was neither a valid law and regulation nor a normative document in force, therefore it could not be directly quoted in the external law enforcement instrument. The tax authority should, after receiving the letter, investigate and verify the specific situation it mentioned and collect relevant evidence to substantiate it. The administrative penalty was decided directly on the basis of the letter, which lacked facts and evidence, and should be revoked.
IS OFFICIAL LETTER ACTIONABLE?
Whether an official letter exchanged between administrative authorities is actionable depends on if it has been externalised with legal effect, and has an impact on the rights and obligations of the administrative counterpart. In most cases, official letters exchanged between administrative authorities are not circulated and shared externally, and do not have external legal effect, so they are not actionable. According to article 1.2(5)(10) of the Interpretation of the Supreme People’s Court on the Application of the Administrative Litigation Law of the People’s Republic of China, acts made by an administrative authority that do not produce external legal effects and have no practical impact on the rights and obligations of citizens, legal persons or organisations do not fall within the scope of administrative litigation before the people’s courts.
When an administrative official letter has an actual impact on the rights and interests of the administrative counterpart, it should be an actionable administrative act. In the above-mentioned case, the official letter from the audit department was not delivered or made public to Company A. The audit office is not the authority to determine and review the qualification of high-tech enterprises and does not have the right to grant or revoke the qualification, therefore, the official letter sent by the audit office to the tax authority had no external legal effect and could not be actioned.
COMMON DEFENCE IDEAS
The core of administrative litigation is to review the legality of the specific administrative act of the administrative authority. If a penalty is imposed on the basis of an official letter between administrative authorities, the legality of the penalty should be examined from the following perspectives:
- Is the content of the official letter true?
- Has the administrative counterpart been informed of the letter’s content?
- If the official letter contains a conclusive opinion that affects the rights and obligations of the administrative counterpart, has the conclusion produced any legal effect? Has it gone through a process of reconsideration or litigation?
- Does the issuing authority of the official letter have the right to make a determination based on the official letter? Or should the determination be made by another authority in accordance with the law?
- Can the official letter itself be used as a factual basis for an administrative penalty?
- Can the official letter replace the investigation of facts and collection of evidence before the administrative penalty decision is made?
Xie Yang is a senior partner at Zhilin Law Firm
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