China is set to launch the Corporate Social Credit System (CSCS) throughout China in 2020. At present, there has been sporadic implementation in various pilot zones for specific aspects and ratings of the CSCS, but soon the entirety of the Chinese market will fall under its remit.
It is crucial that corporations establish their own internal policies to prepare themselves for the full roll out of the CSCS. Such is the scope and scale of the CSCS that one errant department in a company could quickly impact the score of the whole business, as such corporations must improve their own internal communication between departments and develop robust policies to mitigate any potential negative scores under the CSCS.
Key Takeaways of the CSCS
The system is already in place and corporations are currently generating scores, however the master unifying score has yet to be implemented, although it is expected within the next year (2020). For multinational corporations, there are roughly 300 regulatory requirements which are expected to be factors in calculating the credit score. If a corporation’s credit score drops too low there are serious repercussions. Sanctions are not limited to just fines and court orders. They also include higher inspection rates and targeted audits, restricted issuance of government approvals, exclusion from preferential policies (subsidies and tax rebates), restrictions from public procurement.
Sanctions can personally affect the legal representative and key personnel of a company.
Similar to how the corporate rating will affect the Legal Rep and Responsible corporate officer, the employees’ (senior management) social credit score rating will impact upon the company rating.
If a corporation has received a low credit score, they must be proactive in seeking credit restoration, merely fulfilling their legal obligations is not sufficient. To remove a negative record, the company needs to submit a ‘credit restoration commitment’ letter (信用修复承诺 书), whereby the company promises to abide by the law and accepts supervision by the government. However not all low scores can be restored. Scores which relate to public safety or are due to serious crimes such as fraud will not be restored, and the business will be liquidated. Scores which can be restored must usually wait for a minimum publicity period to pass before the company can apply for credit restoration.
Example using credit ratings for Taxation
The tax rating is an example of the linkage between the corporate rating mechanism and the individual rating mechanism of the SCS, as it integrates individual rating results into the assessment of the company’s rating. If the company is registered or operated by a person who is individually rated as an 'abnormal' or Grade-D taxpayer, this leads directly to a D-level rating of the company. By the same token, a company’s D-level tax rating will also have a significant impact on a responsible individual’s personal tax rating. If the company tax rating is D, the individual tax rating of directly responsible personnel will also be downgraded to D. 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. Whenever a company receives an A rating, this positive information is made publicly available via the National Enterprise Credit Information Sharing Platform
Other rating results (may) impact the tax rating and vice-versa
One of the most important characteristics of the rating requirements is the interdependent impact of rating results in other fields. This becomes clear in the tax rating stipulations: rating requirements explicitly include ratings by other government authorities as a criterion for computing the tax rating. As this is the case for many of the already existing ratings, this linkage creates a ripple effect through which a negative rating in one area also puts downward pressure on the company’s other ratings.
Impact upon Legal Rep and Responsible Corporate Officers
Similar to the taxation rating, a negative customs rating will have a significant impact on the company’s legal representative as an individual. With respect to the customs rating, the legal representative will be subjected to travel restrictions if the company fails to pay customs duties or fines and penalties after a corresponding court-order. The legal representative may also be restricted from purchasing insurance products with high cash-value premiums and from purchasing real estate or land if the company receives a rating as a distrusted customs company. It is expected that the legal rep will not be permitted to take on another post as legal representative as long as the company is blacklisted.