What companies need to know about China’s Corporate Social Credit System

In 2014, China’s State Council published its plan on building the Corporate Social Credit System (“CSCR”) aiming at its full implementation by the end of 2020. Today, CSCS has already collected large amounts of data, assessed performance and significantly impacted companies and individuals in China. Although CSCR has been implemented to a large extent, CSCS still needs more time to bridge the gap between its objectives and current deficiencies, which concern for example the execution of sanctioning mechanisms and data-sharing within CSCR.  

It is important for companies to prepare for the regulatory ratings before the complete implementation of CSCR. This article will address the executional steps of CSCR, the impact on companies and how to be compliant with CSCR.

What is CSCS?
CSCS System is the Chinese Government’s comprehensive plan to use technology to monitor and guide companies’ behavior. Generally, CSCS works through 3 steps to assess the performance of companies and to give multiple topic-specific ratings, as follows:

Step 1 Government definition of rating requirements
At first, the responsible government authorities regarding different fields define the requirements that companies need to comply with in order to receive a good rating or avoid a non-compliance record. For example, tax, customs and environment protection authorities would all publish regulations focusing on their own fields. These regulations will together cover all fields of a company’s operations in China, and provide guidance to all companies.

Since 2013, Chinese central government authorities have already published approximately 350 regulations, laws and policies at the national level to define the details of CSCS, including the formulation of rating requirements. A large number of local regulations, which outline the local specific rating requirements, have also been issued to supplement the central government’s regulatory framework. All these regulations will be continuously amended to cover more aspects.

Step 2 Monitoring companies’ behaviors and ratings
After a company wasset up and started doing business, government authorities will systematically collect information of the company and monitor its behaviors based on the information collected. The company’s information mostly comes from data provided by the company itself as well as data gathered during government inspections.

After the collection, government authorities will evaluate the behavior of the company by comparing the collected information with the government-defined requirements for ‘good’ behavior to decide on the rating. Detected cases of non-compliance will lead to bad ratings or even blacklisting. Rating results and non-compliance records will be published via topic-specific rating platforms, and will at the same time be shared between all government authorities via the local databases of CSCS . With the use of information technologies, such as big data and artificial intelligence, more frequent and even real-time ratings that react to any misbehavior can be expected.

Step 3 Rewards and punishments
Government authorities will reward or punish companies based on their ratings. The principle of joint rewards and punishments is the most important characteristic of CSCS.

How CSCS affects companies’ daily operations?
Since every company has to deal with tax issues, we take the tax rating as an example to illustrate how CSCS affects companies’ daily operations.

The tax rating rates companies on a scale from A to D, with every letter-category referring to a fixed range of points that can be achieved. Each company starts out at 100 points and any irregularity in tax payments, reporting requirements, invoices or account books would then lead to a point deduction to arrive at the final score. To achieve an A-level rating, companies must be in full compliance with tax law and regulations.

If a company achieves an A-level rating, this positive information will be published via the National Enterprise Credit Information Sharing Platform. Besides, the company will be granted joint rewards from tax bureau and other authorities, such as:

1. Granted ‘Fast Pass’ for applying administration approvals;
2. Priority for preferential policies; and
3. Certain conveniences for financing.

If a company has been rated at a D-level, it will be classified as a ‘distrusted enterprise’ and this negative information will be disclosed to the public through platforms. The company will suffer joint punishments such as: 

1. Higher inspection rates and additional audits implemented directly by the tax bureau;
2. Exclusion from public procurement;
3. Restrictions regarding customs affairs, financing and foreign exchange quotas;
4. Difficulties to obtain administration approvals, regarding e.g. business license and environmental protection permits; and
5. Legal representative and directly responsible personnel of the company will be restricted to travel and purchase real estate or land.

Regulatory ratings have a long memory, which means it can take a long time to recover from a low rating. For example, being rated as a D-level tax company excludes the enterprise from receiving an A-level rating in the next rating period. Usually, it will take a company several years to achieve an A-level tax rating after obtaining a negative rating result.

Recommendations for foreign invested companies
China is further opening its market to international players and is gradually lifting the restrictions on market access. After the new Foreign Investment Law comes into force in 2020, foreign invested companies will hopefully be treated with more equality in most industries. At the same time, the System will play as a significant role in China’s new market access regime.

To be in compliance with the CSCS, foreign invested companies are recommended to follow up on the points below:

1. It is recommended to get a full understanding of the ratings that apply to the  companies’ business operations in China. After identifying the applicable ratings, companies should pinpoint the full catalogue of specific requirements that are used to compute the ratings that need to be fulfilled. Most of this information is available, but usually it is dispersed across a large amount of government documents and can therefore be difficult to collect in full. It is essential that companies conduct the necessary analysis on compliance in order to proactively prepare;
2. As the CSCS continues to be adjusted, expanded and improved, companies need to stay on top of further developments. An effective monitoring system that provides companies with the ability to react quickly is essential;
3. Companies should seek direct conversations with Chinese government authorities to raise questions relating to the CSCS. In order to achieve a productive and ultimately helpful conversation, companies are advised to identify the correct government authority, either at national or local level, which carries out the responsibility for a specific issue.