on February 19, 2007.
When was the last time you were challenged with a new tax return? I mean, really, a new return! When was the last time you went through a set of tax return forms and instructions you'd never seen before and enjoyed doing it? Long ago and far, far away, I actually looked forward to the challenge of the tax return! But that was then and this is now.
I got my first 2007 copy of Information on Laws in China, and there was a bilingual extract of Guoshuifa 162, the November 6, 2006, law, "Measure for Self-Declaration and Payment of Individual Income Tax (For Trial Implementation)." This was the first opportunity I've actually had to look at the law itself. I had seen the tax return forms and instructions and read others' interpretation of the law, but had not had the opportunity to look at the actual law. The one thing I can tell you, with assurance, is that there will be no "trial implementation." It is permanent. Although the new laws will not necessarily be enforced at inception, let the P.R.C. taxpayer beware!
Here is my executive summary of what I believe is relevant in the Guoshuifa:
- Article 2: Any taxpayer liable to pay individual income tax, as required by law, should declare and pay to tax authorities his individual income tax on his own if he:
- earns an annual income above RMB 120,000 (item 1);
- has two or more domestic sources of salaries or compensation (item 2);
- obtains income(s) from overseas (item 3);
- obtains taxable income from any person or entity that is not obligated to deduct withholding tax (item 4); or
- meets any other conditions specified by the State Council (item 5).
- Article 3:
- For those earning income under item 1 (above): Taxpayers should file and pay (when taxes are due) to the proper tax authorities their individual income tax after the end of the tax year, regardless of whether their taxes have been paid in full through their employer.
- For those earning income under items 2, 3, or 4 (above): Taxpayers should, upon receipt of income, make tax declaration to the tax authority in charge, as per this law.
- Article 4: "Taxpayers who obtain income(s) from overseas" (item 3, above) are those individuals with domicile within China or who have resided within China for one full year within the current tax year.
Short and succinct, but with one addition: On December 15, 2006, the State Administration of Taxation (SAT) issued a circular on the definition of self-tax payment:
Income relates not only to compensation for services provided but for license fees income, income from property rental, income from conveyance of real properties, interest income from debentures issued by enterprises, income from transfer of stocks.
Do you have any questions? I certainly do. Do you think that the SAT offices will have questions? I undoubtedly believe so. Do you think that answers will be provided? Yes. On a timely basis? I wouldn't hold my breath.
Let's look at the tax return itself, not the instructions. Upon first glance, the two-page return, which is reproduced in a single page at the end of this article, provokes the following comments:
- There's not enough space to fill the form out, unless you are filling it out only in Chinese.
- There are a lot of boxes and spaces on both pages that must be filled out, but there is no room to explain things.
There are only 1-1/4 pages of instructions that do not cover all of the spaces that must be filled out, which raises other questions.
There are four main paragraphs in the short set of written instructions. Paragraph II immediately goes into specifics that the tax law does not cover:
Taxable individuals have the obligation to fill out and submit the return to the local tax authority within 3 months after the end of the tax year, either by themselves or other entrusted preparers. In case of inability to file the return within the prescribed time limit an application should be submitted to the local tax authority within the prescribed time limit and upon the tax authority's approval the filing deadline may be extended. [Emphasis added.]
Paragraph III is something I did not anticipate:
The return should be filled out in Chinese or in both Chinese and a foreign language.
This adds a new wrinkle, as non-Chinese taxpayers will have to seek assistance in filling out the form.
Paragraph IV has 13 numbered subsections, not all of which are easy to tie to the spaces provided on the tax return. Under subsection 1, the instructions state that the tax ID number should be the same as the individual's tax registration number. How this will be handled for those who are not registered is open to conjecture. Other subsections of interest are:
- ID Type (subsection 3) and ID Number (subsection 4): ID Card (for Chinese), passport, or military staff certificate. I predict that this category will be expanded to include the tax ID similar to that required by each jurisdiction that the P.R.C. has entered into a tax information exchange agreement. Initially, this means Hong Kong.
- Date of arrival in China (subsection 5): This is only applicable to taxpayers without residence in China.
- Foreign tax credit (subsection 12): Only the amount that is eligible for credit against Chinese tax in accordance with the individual income tax law of the P.R.C.
- The form should be submitted in duplicate, A4 size, and horizontal format (subsection 13).
One initial question I have is, what is an entrusted preparer? I have to assume that it is the registered or certified tax agent, a position that has existed since 2001 or 2002.
The same issue of Information on Laws of China contained an extract of a circular released by the SAT on November 2, 2006, "Circular of the State Administration of Taxation on Establishing a Publicity System in the Industry of Certified Tax Agents." The SAT has decided that certified tax agents' services should be publicized and that the provincial administrative center for certified tax agents should regularly make announcements in newspapers, industrial Web sites, or other public media.
I am not disputing that there is a provincial administrative center for certified tax agents. However, we are already well into the three-month period before the end of the filing season, and no one I know has ever seen an ad in any Chinese newspaper or on a Chinese Web site. So how are you going to develop a system of tax preparers?
Interestingly enough, the majority of the certified tax agents I'd spoken with had heard about the new individual income tax return, but none of them had seen either the forms or the instructions. That does not instill much confidence in the system.
I think, though, that there is simply too much at stake for the government to allow the new tax system to fail. Last year, China collected RMB 245 billion in personal income taxes. That was 17 percent more than in the previous year. While I believe that funding will be slow in the implementation of the projects needed to reach the goals of the 11th five-year plan, I also believe that funding will be far more rapid in expanding the tax bureaucracy and making the system work. How long will this take? I don't know. But if you look at the system a decade from now, it will be like night and day -- the revenues necessary to open up the impoverished parts of this country will be attainable, and no one will be immune from the system.
China is using the United States and the Internal Revenue Service as its business model. The result could be a tax system that makes it more difficult to shelter funds from taxes, either within or out of the country.
So what do you do now? Well, if you live in Beijing, I would be particularly concerned because that's where the system will work first.
Chinese citizens, especially the high rollers, are responsible for reporting their worldwide income -- all of which is subject to taxation. This is also true for the non-Chinese who have lived in China for five years or more.
An individual who is not domiciled in China who has lived in China for over one year but under five years may be taxed only on the portion of his income derived from services rendered in China or for the Chinese business he or she works for.
My advice to those who have been in the P.R.C. for five consecutive years or more: Get out of the country for 30 days. This starts the clock all over again.
My advice for people who think they might have to file a tax return: File it, and file it on time! Don't take a chance -- avoid a potential late penalty of up to RMB 10,000. Don't worry about an audit this year, but five years from now, I'd start worrying.
The taxpayer must list income from within China, which is easy to do. Listing the income from outside of China is more of a problem, especially if you try to explain things properly within the small boxes provided on the tax return. Don't worry; protect yourself by explaining things on attachments that you add to the back of the tax return. If it is not taxable (how often are you going to volunteer that information?), then place a zero in the tax owed or overpaid box. Tax overpayment? Don't hold your breath about getting a refund, at least for this year!
Another prediction: The tax return form that will be used next year will bear little resemblance to the current form -- it will not work.
I mentioned in an earlier article, with cynicism intended, that the Beijing local office of the SAT made claims about its Web site that were unsupportable in English. Well, even that has changed, and quite rapidly, too. There is now an English-language button on the home page, and what is available on this site has been transformed in less than a month. I have to eat my words. It has become, overnight, quite a good site. Although there is still no information about filing or e-filing the individual income tax return, I now look at this site on a weekly basis because I expect to see this soon.
A decade isn't even a blip on the radar screen of Chinese civilization. Yet in a decade's time, I expect to see the SAT instill the same fears among the Chinese citizenry that the IRS does in U.S. citizens. This might not shake the world, but it sure shakes me.
Laurence E. Lipsher is an American CPA who practices accounting in Guangzhou, P.R.C. He is a member of the American Institute of Certified Public Accountants, the California Society of Certified Public Accountants, and the Hong Kong Institute of Certified Public Accountants.
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