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China: Collection of Individual Income Tax on High-Income Earners to Be Strengthened

(June 20, 2011) China's State Administration of Taxation recently published a circular ordering the tax authorities at all levels in the country to pay closer attention, in collecting individual income tax, to high-income earners. (State Administration of Taxation Circular on Earnestly Strengthening the Administration of the Levy and Collection of Individual Income Tax on High-Income Earners (Guo Shui Fa [2011] No. 50, promulgated on Apr. 15, 2011) [in Chinese]; for an English digest, see CHINA LAW & PRACTICE (May 2011) (by subscription) (CLP Reference: 3230/11.04.15).)

The Circular does not define “high-income earners.” Instead, it spells out the sources of income and the industries and groups earning high income that will be targeted for purposes of augmented tax collection. The sources include income derived from:

· transfer of property: income derived from the transfer of equity in private companies by individuals; equity obtained from overseas investment by individuals; income derived from the assignment and auction of housing;

· interest, dividends, and extra dividends: focusing on the conversion to registered capital and share capital of retained earnings, surplus reserves, and appraised asset appreciation; and

· production and other business operations: focusing on income derived from production and other business operations of relatively large, wholly individually-owned, and partnership enterprises as well as individual businesses. (Circular, II.)

In regard to industries and groups earning high income, the Circular calls for a closer look at individuals whose main source of income is not from labor, including: high-income groups that hold a large amount of company equity, that receive a large amount of earnings from investment, and that engage in investment in real property and mineral resources, private equity funds, and investment trusts. The Circular also seeks enhanced collection of tax on the income of high-income foreign nationals, in particular the income derived from sources outside China of individuals who are not domiciled in China but who have resided there for more than five years. (Circular, III.)

In China there has been a strong, ongoing public reaction, pro and con, to the draft amendment to the Individual Income Tax, which would increase the exemption for personal income tax from RMB2,000 (about US$307) to RMB3,000. Before the current draft of the amendment was published, however, there was a high expectation that the threshold would be raised to RMB5000, and therefore there is still the hope that a more generous threshold might ultimately be adopted. It was anticipated that the government's tax plan, which includes raising the exemption and other measures to give relief to lower income workers, would cost the government RMB120 billion. (Zhang Fenming, Tax Authorities Eye Certain High-Income Earners, SHANGHAIDAILY.COM (June 6, 2011).)