SAT’s New IIT Collection Measures to Focus on Foreigners

The State Administration of Taxation (SAT) has recently announced measures to intensify the regulations on individual income tax (IIT) levied on high-income individuals who may obtain their incomes from more than one avenue.

The “Circular on Effectively Improving IIT Collection from Individuals with High-income (guoshuifa [2011] No.50),” issued on April 18, requires tax authorities to conduct better supervision on IIT collection on incomes that are derived from equity/property transfers, capital gains, as well as corporate production and operation. It calls for special attention be given to foreigners and individuals who receive a significant amount of non-labor incomes or work in industries with high compensation.

IIT on equity/property transfer incomes

The government intends to tighten the reviews on equity transfers with transfer prices the same as or below the original equity values, so that the related incomes are not undervalued. Tax authorities shall make effective use of the e-ledger system to better manage the original value and tax payment records of the equities in transfer.

For individuals who transfer their properties, tax authorities shall verify the actual value of real estate transfers before IIT collection. For those transfers whose value cannot be verified, authorities shall assess the transfer income according to related regulations.

For individuals who auction their real estate, the auction house shall withhold the IIT on the auction income.

IIT on interest, dividends, and bonuses

The Circular calls for stricter investigations into undistributed profit, reserve, capital appreciation and asset revaluation that are converted into registered capital and equity. For continually profitable enterprises that do not distribute dividends or bonuses, tax authorities shall conduct further investigations into the actual income of the enterprises’ individual investors.

IIT on production and operation income

Proprietorship or partnership enterprises’ income from investments on equities, futures, funds, bonds, foreign exchange, heavy metals, and resource exploitation rights shall all be counted as production and operation income, and are subject to IIT payment.

When investors of proprietorship enterprises, partnership enterprises or individual businesses use the investment fund for their own family consumption, IIT shall be levied according to related regulations.

Foreign individuals face stricter supervision

Foreign individuals, especially those who have resided in China for less than five years, are one of the targeted groups under the new regulation. According to Jacky Qi, tax associate at Dezan Shira & Associates, IIT issues for foreign individuals are specifically complicated, because the calculation methods and exemption policies vary along with the foreign individuals’ duration of stay in China, income sources, employer sources as well as positions. For example, it is sometimes difficult to identify if a foreign individual’s income paid by his/her overseas entity is derived from China or not.

The Chinese government now is working on a more effective system to tackle the issue. On one hand, the SAT intends to make better use of Tax Information Exchange Agreements to avoid foreign IIT evasion; on the other hand, it also requires stricter supervision of foreign individuals’ incomes from non-independent services and permanent establishment’s payment to foreign individuals, in order to effectively avoid the abuse of double tax agreements.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China. The firm specializes in assisting foreign enterprises and individuals with their annual tax obligations. For advice, please email tax@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.

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