The Taxation Risk and Social Responsibility of Cultural Industry after It Goes Public

Liu Tianyong

During the process of IPO and after IPO, cultural and media companies making a good control and arrangement of the tax costs of the company is an important part of the operation and management of cultural enterprises. The common taxation risk is as follows:

1. The company does not or does not fully make use of state and regional taxation preferential policy, which leads to the increase of tax burden.
2. The risk of appraised collection by tax authority at a relatively high taxation rate due to inaccurate of accounting and incompleteness of accounting ledger.
3. Lack taxation plan or arrangement for important operation, this lead to the increase of operation cost.
4. Being punished because of the non compliance of accounting treatment and taxation treatment.

The basis of reducing the taxation risk is to perfect the financial system, and to establish modern financial system is more urgent especially for the cultural company reformed from public welfare enterprise owned and operated by state. Simultaneously, after the cultural company makes IPO, it become a public company, so it shall adjust the operation strategy such as development theory of company, product service ,investment direction, and the business operation shall be in coincidence with national industry policy, core value system of nation, and pubic expectation, and balance the economic return and social benefit.

The foundation of reducing taxation risk is to establish modern financial system.

For the cultural company after restructuring, a prerequisite of reducing taxation risk is to establish modern financial accounting system. The accounting systems and principles adopted by our country’s company are different because of the difference in  type and scale of company. For small scale companies, currently they will adopt the Small Scale Company Accounting System issued in 2004, and according to latest regulationa in Cai Kuai (2011) No.17, from Jan 1^st 2013, the small scale company will adopt Small Scale Company Principle. Most of the public welfare enterprise will adopt Public Welfare Enterprise system being effective from Jan 1^st 1998, compared with company’s accounting system, there is simplicity in installment of accounting account, accounting recognition and measurement for the public welfare enterprise, and the requirement for the standard of accounting information to the outside user is low.

For the public company, they are required by relevant authority to strictly adopt the Enterprise Accounting Principle being into effect from Jan 1^st 2007. There are many drawbacks for the public welfare enterprise accounting system compared with enterprise accounting principle, for example:

1. For the payables that have not been paid or the paid expense that shall be amortized, it does not set the account of accrued expense amortized expense to calculate.
2. The payment range and standard is not clear for the entertainment allowance and expense, the withdraw proportion of welfare premium, it is not convenient for the practice accounting.
3. The fixed asset is not depreciated, and therefore it is difficult to guarantee the in-time update of fixed asset.
4. Do not withdraw bad debt provision of account receivable from operational income by prudence principle, which will lead to the false increase of profit.

So the cultural company shall reconstruct the financial system and establish modern accounting system in reform and IPO. The main job contains:

First, organize financial department of company. It may introduce general accountant system, to organize and lead the financial management, cost management, budget management, accounting calculation and accounting supervision of this company. Simultaneously, based on the scale and operation model of the company, set the accounting post of treasurer, salary calculation, cost, revenue and profit in scientific way.

Second, to set accounting accounts according to Enterprise Accounting Principle and to recognize and measure accounting information according to accounting principle. Transformed entity shall organize financial staff to study latest accounting principle, and at the same time, it shall actively introduce accounting computerization system.

The taxation preferential policy for cultural company during reform

The state council issued The Notice Concerning Issuing Two Regulation of Operational Cultural Public Welfare Enterprise Transformed to Company During Culture System Reform and Supporting the Development of Culture Enterprise. In order to implement the notice, relevant department gradually issued two taxation document Cai Shui [2009] Nu 31, Cai Shui [2009] Nu 34, No 34 document explicitly regulates the taxation preferential policy of reform company.

According to Cai Shui [2009] Nu 34, from Jan 1^st 2009 to Dec 31th 2012, the reform of operational culture public welfare enterprise can enjoy the following preferential:

1. Operational cultural public welfare enterprise transformed to company, from the date of transformation and registration, it is exempt from corporate income tax
2. The culture unit allocated entity fund by financial department is immune from paying property tax for the self-operated property from the date of transformation and registration.
3. The culture company constructed from the stripped publishing and printing business unit and relevant operational asset of party’s newspaper and party’s journal, it is immune from paying VAT for publishing income and printing income of party’s newspaper and party’s journal gained from date of registration.
4. For the corporate income tax involved in value appreciation in asset evaluation and VAT business tax urban maintenance and construction tax involved in asset transfer of the operational culture public welfare entity during transformation, these will get appropriate preferential, the concrete preferential policy will be determined by finance ministry and SAT according to transformation scheme.

According to Cai Shui [2009] Nu 34 and Cai Shui [2009] Nu 105, the transformed culture company enjoying the above taxation preferential policy shall satisfy the following requirements:

1. To transform according to the answer approval of relevant department
2. The transformed culture company has finished enterprise industry and commerce registration
3. If it has finished public welfare enterprise legal person registration before transformation, it shall cancel the public welfare enterprise legal person.
4. It has signed labor contract with all the staff, and participate social insurance in conformity with the method of company.
5. The field of culture enterprise shall conform to the regulation of attachment of Cai Shui [2009] Nu 31 the notice o f tax policy problem to support development of cultural company by finance ministry maritime customs administration SAT.
6. If the transformed culture company introduce private capital and overseas capital, it shall conform to the regulation of nation’s law regulation and policy, if it want to change capital structure, it shall be approved by industry supervise department and state culture asset administration department.

In addition, after culture enterprise reform and go public, it can also enjoy tax preferential policy of relevant concrete industry. Mainly include: newspaper publishing, video television, software internet, advertisement exhibition and design service. In addition to the requirement of independent calculation in finance, it has a lot of compliance request and filing obligation. For example, with regard to relevant stipulation for culture new and high technology: in such field as technology supported by culture industry, the company recognized by the regulation of (Guo Ke Fa Huo [2008] No 172) and (Guo Ke Fa Huo [2008] No 362) to be new and high technology company, will be imposed corporate income tax on taxation rate of 15%. If the culture company wants to enjoy the preferential policy of 15%, it shall provide material in six field including core self-developed intellectual property, new and high technology income, research and development expense, it shall also fulfill the obligation of filing in department of taxation and technology.

In the severe taxation inspection situation, we shall make a good taxation arrangement.

Under the background of lower the expected economy development speed, the tax authority surely will intensify the tax inspection in order to fulfill the taxation collection purpose. According to Ji Bian Han [2012] No1 The emphasis of National Taxation Inspection in 2012, capital transaction is listed as directory item in special taxation inspection. During the process of IPO and after IPO, capital transaction faces rigor tax inspection risk, taxation risk exit everywhere, relevant company shall pay enough attention.

Take the favored IPO of current culture media company, the potential taxation risk concentrates on the following several part:

First: Historical taxation problem. If the historical taxation problem is not properly dealt with, the IPO taxation cost will surely be increased. So the company applying for IPO shall actively make efficient communication with relevant taxation authority, if needed, it may apply for approval for tax authority to clarify the treatment of taxation problem, and solve the taxation problem as soon as possible.

Second, the taxation problem in restructure. The company usually need to make restructure in stock holding structure and business operation model. During the process of restructure, company usually face the taxation problem of “whether it is more efficient in the arrangement of controlling shareholding structure in IPO” “whether the business model of restructure will bring new taxation cost” “whether it make the transfer price problem of related transaction more serious”.

Third, taxation reliance. Administrative Measures of Initial Public Offering and Listing of Shares clearly indicates that “the operating results of issuer shall not have heavy reliance on the taxation preferential”. In the practice, if the taxation preferential account for more than 20% of average profit, it will constitute heavy taxation reliance, at the same time it is an absolute obstacle of IPO. Currently, during the inspection to the taxation related problem by the supervision department, taxation reliance has been an very important part.

After the culture company successfully IPO, no matter vertical or horizontal expansion, or through merger and acquisition or domestic investment, it all face big capital transfer, this will involve business tax VAT income tax land appreciation tax deed tax and stamp tax. If it is not properly dealt with, it will assume big taxation cost, this require the culture company in make thorough taxation plan after it go public.

The culture company shall take fulfilling social responsibility into corporate governance.

Recently culture company receive high emphasis, on one hand this come from the need of industry adjustment and develop new economy, on the other hand, it come from the need of cultivate the spiritual civilization of socialism.

First, cultural company shall include social responsibility into the corporate administration theory.

Second, the product operation of cultural company shall be in conformity with nation’s core value system.