TAX NEWS - 2010

China Tax: Administration of high-income individuals strengthened

China's State Administration of Taxation (SAT) issued guidance on 31 May 2010 (Circular Guoshuifa (2010) No. 54) that instructs the local tax authorities to step up the collection and enforcement of tax on high-income expatriate and PRC individuals. The circular expands the types of income to be scrutinized to include employment income, as well as passive income such as dividends, interest and capital gains.

To enhance the accuracy and completeness of information declared by individuals whose annual income exceeds RMB 120,000, the local tax bureaus are required to take the following steps:

- Enhance information sharing with the local State Administration for Industry and Commerce, Real Estate Administration Bureau, Social Security Bureau and Securities brokerages, etc., on sources of income derived by such individuals;

- Better identify the sources and structuring of income of high-income individuals; and

- For taxes that have not been withheld or where there has been insufficient withholding, ensure that the individual pays the relevant amount in accordance with the Administrative Law of the PRC on the Levying and Collection of Taxes.

Circular 54 also requires tax withholding agents to provide details of all types of taxable income paid to individuals, with penalties for failure to provide full details in accordance with the Administrative Law of the PRC on the Levying and Collection of Taxes.

Circular 54 requires the local tax bureaus to focus their enforcement efforts on the following types of income:

- Income from the transfer of property – This includes income from the sale of China-listed restricted stock, the transfer of shares of unlisted companies, the transfer of real property and income from auctions. The local authorities are instructed to enhance communication and information sharing with all relevant parties and government agencies.

- Income from dividends, interest and equity investments – The local tax authorities are required to investigate  and examine accounting books, financial statements and assets of enterprises to verify that income from dividends,interest and equity investments received by high-income individuals is declared and is subject to tax in China.

- Income from personal services – The local tax bureaus are required to work closely with other relevant authorities to obtain information on payments made for personal services to ensure that Chinese individual income tax is withheld, particularly with respect to individuals providing consulting, lecturing, financial planning, acting and full/part-time training, etc., services. In addition, for high-income industries, the total salary expenses claimed in the corporate income tax return would be cross referenced against income reported in individual income tax returns.

- Income derived by expatriates – The local tax bureaus are required to work closely with immigration and public security bureaus to obtain information on the timing of expatriates' arrival into and departure from China to ensure that individual income tax is paid before departure. In addition, the local tax bureaus are instructed to proactively collaborate with banks and the State Administration of Foreign Exchange to monitor and collect information on remittances overseas. The authorities will need to set up records for expatriates and gather benchmark information on remuneration standards, with a particular focus on enhancing the administration of China-source income paid offshore.

- Income from sizeable sole proprietorships, partnerships and industrial and commercial households – Sole proprietorship, partnerships and industrial and commercial households are required to maintain proper accounting books and records for verification by the local tax bureaus. Prior to business de-registrations, investors of enterprises are required to settle all outstanding individual income tax during the tax clearance process.


Comments

Circular 54 clearly signals the SAT's continuing efforts to strengthen the reporting, administration and tax collection on high-income expatriates and PRC nationals. While previous circulars tended to focus on salaries, wages and bonuses, stock options and related equity-based incentives, Circular 54 extends the focus to a broader range of income, with capital gains, dividends and interest income being thrust to the fore.