Double-high Individuals and Offshore Income May Become the Focus of Personal Tax Verification

Introduction.

“[China Tax] Dear Taxpayer, Hello! In order to further help you fulfill your tax obligations in accordance with the law and avoid tax-related risks, please take into account your own situation and sort out all your income and tax declarations for the year 2023, and check whether the types of income declared, the amount of income, the deductions for expenses, and the items of tax relief are true, accurate, and complete. In order to help you eliminate the risk as soon as possible, XX Municipal Tax Bureau personal tax special team will contact you in the near future, please pay attention to answer the phone. Contact number: XXX.[State Administration of Taxation XX Municipal Tax Bureau]”

Recently some people investing in crypto assets have been receiving tax risk reminder text messages sent by the tax bureau. In this article, the TaxDAO research team interprets such tax-related risks to help you complete your tax declaration and fulfill your tax obligations in accordance with the law.

1.Verification Background

According to Article 11 of the "Measures for the Administration of Taxpayer Classification" of the State Administration of Taxation of the People's Republic of China, individuals can be classified as high-income and high-net-worth individuals (referred to as "double-high individuals") and general individuals based on their income and assets.With the development of the economy, the number of double-high individuals in China has been increasing, and the proportion of foreign income in personal income has been growing. At the same time, tax authorities around China have been paying more attention to the tax collection and management of the income of double-high individuals and offshore individuals, and there have been corresponding cases of tax collection and management in various regions. Recently, tax authorities in major cities across the country will verify the tax declarations of double-high individuals and individuals with overseas personal income in the form of special individual tax teams, and the SMS at the beginning of this article reflects this trend.

2. Interpretation of Verification Features

This tax inspection has two major characteristics. The first is that the inspection targets are clearly defined, precisely aimed at high-income individuals and individuals with foreign income. These individuals have high incomes, diverse sources of income, a variety of personal assets, and many tax-related matters, which may lead to omissions in tax reporting. More importantly, these individuals usually engage in tax planning, but some tax planning itself carries compliance risks. For example, transferring equity at a low price in related-party transactions, or transferring equity in the form of a dual contract; or, "directors, supervisors, and senior management" may convert the form of their income to avoid higher personal income tax rates; and again, using offshore companies and accounts to defer tax payments, as well as using foreign nationality to avoid taxes, all these actions carry corresponding risks.

The second feature is the high level of verification, establishing a special tax team to carry out tax verification. A special team refers to a temporary working group composed of personnel drawn from different departments or units to accomplish a specific task or project. The main function of the special team system is to concentrate efforts on solving temporary tasks. Although the individual tax special team is not a permanent, formal organization, the establishment of such teams across various regions indicates the emphasis placed by the State Taxation Administration of China on this work: concentrating resources, and efficiently and flexibly conducting tax verification on high earners and individuals with overseas income.

3. How Individuals Prevent and Control Tax Compliance Risks

The establishment of the individual income tax special team and the initiation of related verification work have imposed higher individual income tax compliance requirements on  double-high-income individuals and those with overseas income, and the tax compliance of foreign income is likely to be the most important aspect of the verification. the TaxDAO team suggests that double-high individuals and individuals with foreign income should avoid tax compliance risks in the following aspects:

First, tax planning should match the economic substance. Tax evasion should not be implemented beyond the reasonable limits of the tax law or against the provisions of the tax law.

Second, tax compliance self-examination should be conducted regularly. Due to the complexity of income sources, double-high individuals and individuals with offshore income may not be able to identify their tax compliance omissions and risks in a timely and comprehensive manner. In this case, it is necessary to arrange for relevant internal personnel or hire tax professionals to intervene in order to self-check and correct tax-related matters, so as to identify and resolve tax compliance risks at the first time.

Thirdly, with the help of tax and legal professionals, we should properly respond to tax audits and related administrative and criminal penalties. Tax audits, administrative and criminal penalties are highly specialized, and the lack of professional help may cause one to suffer great losses. In terms of procedure, one should protect one's legitimate rights and interests through legal procedures such as reconsideration and litigation in accordance with the provisions of the Tax Administration Law, Administrative and Criminal Procedure Law, etc. In terms of entity, one should start from the core issues of tax disputes, and argue for and defend against non-punishment and mitigating penalties, so as to minimize the losses caused by compliance issues.

Fourthly, individuals with foreign income should pay special attention to the Announcement on Policies Regarding Individual Income Tax on Overseas Income (Announcement No. 3 of the Ministry of Finance and the State Administration of Taxation of 2020) (hereinafter referred to as “Announcement No. 3”）. In the context of Announcement No. 3, persons who have emigrated overseas but have not yet canceled their Chinese residency, as well as those who do not have Chinese residency but work and live in China for an extended period, and so on, need to deal with the tax declaration of both domestic and overseas income in a prudent manner.

Overall, as with other Chinese citizens, individuals with high income and high net worth, as well as those with foreign income, must strictly follow the relevant Chinese laws and regulations and fulfill their tax obligations in accordance with the law. If you have any related questions, please feel free to scan the QR code at the end of this article to contact TaxDAO.

References:

[1] Tax Compliance Report for High Net Worth Individuals (2024). China Tax. https://www.huashui.com/zh-hans/home.html.

[2] Foreign Income Tax Return Obligations - How Should High Net Worth Individuals Interpret Them?KPMG.https://kpmg.com/cn/zh/home.html