Early Warning Mechanism Research Of Small And Medium-sized Enterprise Tax Risk

Tax risk is an uncertainty which is faced by all tax-related activities within theordinary course of business. Tax risks, environmental risks, operational risks, andfinancial risks and so on consist the overall risk of enterprises. As a risk which isfaced by all enterprises generally, tax risk does not change with the size of aenterprise.SMEs offer outstanding contributions to the social stability: They take part in99.8%of all Chinese domestic enterprises and contribute nearly60%of overalleconomic output,50%of overall revenue, and80%of overall employmentopportunities. However, compare with large companies, features like the small-size,inadequate management systems, relatively low-quality of its own staffs, andeconomic interests preference push SMEs to the front of severe tax risks which maybreakout to serious damages.By the analysis of tax risk reasons of SMEs, we found that the main reason existinternally and externally. The internal reasons mainly are: SMEs are lack ofawareness of tax risk; SMEs have inadequate internal management systems; and taxplaning result in tax risks. The external reasons are: deficiencies exist in the Chinesedomestic tax legislation system; tax collection process is not standardized which leadsto a relative high tax cost complied by SMEs.Through the studies of the causes of SME’s tax risks, it is found that the essentialresearch part is on how to establish a tax risk‘early-warning’system within SMEs. AsSMEs generally have clear financial indicators and simple data resources which arecapable to reflect SMEs’ tax risks directly, the establishing of SMEs’‘early-warning’system mainly starts from quantitative aspects; takes the availability, criticality andsensitivity as principals, and chooses13financial indicators to built up the indicatorsystem. By the application of AHP(Analytic Hierarchy Process), we constructed ahierarchy-structured model, calculated the first and second weight of indicators, andthen built up a series of tax risk ‘early-warning’ system to help SMEs to detect signsof tax risks. As a consequence, the managers of SMEs are able to assess and analyzepotential tax risks and then manage risks more effectively.In the field researching we choose representative traditional industry-MachineryManufacturing as out aim industry. We adopt financial data for the4quarters of2012from8qualified and financially sound SMEs as analyses samples, and utilize tax risk‘early-warning’system to conduct early-warning analyses of tax risks of enterprises.