In order to implement the Individual Income Tax (“IIT”) Law of the People’s Republic of China (“PRC”) revised in 2018 (“2018 Version of the IIT Law”) as reviewed and approved by the Standing Committee of the National People’s Congress (“NPC”) on 31 August 2018, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) released the Exposure Draft of the Revised Implementation Regulations for the IIT Law (“Exposure Draft of the IRs”) and the Exposure Draft of the Interim Measures for Special Additional Deductions (“SAD”) for IIT (“Exposure Draft of the IMSAD”) on 20 October 2018. Recently, the finalized Revised Implementation Regulations for the IIT Law (“2018 IRs”) and the finalized Interim Measures for SAD for IIT (Guo Fa [2018] No. 41, “Circular No. 41” or “IMSAD”) were released (hereinafter the “Revision”). Both of them take effect since 1 January 2019. Based on the revised contents of the 2018 Version of the IIT Law, 2018 IRs further explains the residence time standard, scope of income, deduction items, overseas tax credit, and etc. in details. Comparing with Exposure Draft of the IRs, some technical positions in 2018 IRs are amended to some extent. The finalized Circular No. 41 stipulates deduction amount, deduction methods and management rules of the SAD items. Comparing with Exposure Draft of the IMSAD, Circular No. 41 enhances the operability of relevant technical provisions.
In comparison with the Implementation Regulations for the IIT Law as revised in 2011 (“2011 IRs”), 2018 IRs has made significant revisions to certain contents. Please find the tabular comparisons of relevant revisions as below. We also attach thereafter a tabular introduction of Circular No. 41. Our comments on the regulations and circular are set forth below as well.
Major Revisions of the Provisions and Our Comments
Refining residence time standard and changing “5-year relief” rule to “6-year relief” rule
Haiwen Comments (“HW comments”):
2018 Version of the IIT Law has changed the residence time standard of “resident individuals”, replacing the “1 year” standard with a “183 days” standard, making it easier for overseas individuals to become “resident individuals” of China. Nevertheless, in order to attract and retain overseas talents, Exposure Draft of the IRs maintains the previous “5-year rule” and “non-temporary trips out of China” provision to some extent, which reserves tax relief treatment for foreign individuals who do not have a domicile in China. The officially promulgated 2018 IRs further changes the “5-year rule” to a “6-year rule”, say, for overseas individuals without a domicile in China, if they stay cumulatively for 183 days per year in China for no less than 6 consecutive such years, they shall pay PRC IIT on their global income starting from the 7th such year. For overseas individuals who become PRC tax residents only because they meet “residence time standard”, if they leave China for more than 30 days in a single trip in any year during which they become a tax resident, the number of consecutive years in each of which they reside in China cumulatively for 183 days shall be restarted to count. In conclusion, although 2018 Version of the IIT Law has made it easier for overseas individuals to become “resident individuals” of China, relevant individuals can reasonably reduce their risks of being subject to PRC IIT by applying the “6-year rule” and planning a “non-temporary trip out of China”.
2018 IRs provides that in order to apply the “6-year relief” rule, relevant individuals shall do a filing with tax authorities (in 2011 IRs, tax authorities’ approval is required in order to apply the “5-year rule”). Such arrangement will reduce uncertainty in the process of applying the preferential treatment. It should be noted that if an overseas individual could not file with (report to) tax authority in time to apply the “6-year rule”, he/she might be subject to PRC IIT for overseas income. It should also be noted that, for an overseas individual who has a domicile in China, he/she is subject to PRC IIT for global income starting from the date when he/she owns a domicile in China, and he/she could not enjoy the preferential treatment of the “6-year relief” rule.
Adjusting scope of income prudently, “deemed transfer of properties” rule ultimately not adopted
Adjusting “source of income standard” prudently
HW comments:
The Revision adds the stipulation “unless otherwise stipulated by the State Council’s fiscal and taxation departments” to the judgment criteria of the source of income. From a literal point of view, since mainbody clause of this Article is a “universal affirmative judgment” (say, for specified types of income, regardless of whether the place of payment is within China, such income is regarded as income sourced from China), the State Council's fiscal and taxation departments can only provide exclusionary (negative) exceptions (to otherwise stipulate) to relevant types of income specified in this Article. That is to say, the fiscal and taxation departments can exclude certain circumstances stipulated in this Article from being regarded as income sourced from China. And they are not allowed to create other circumstances outside the circumstances stipulated in this Article as additional scenarios “regardless whether the place of payment is in China”.
In Exposure Draft of the (2018) IRs, it stipulated that “income derived from business activities carried out in China” (“business operation income”), “income derived from transfer of equity assets constituted by investments in enterprises, institutions or other economic organizations in China” (“equity capital gains”) and “author’s remuneration and contingent income paid or borne by enterprises, institutions, other economic organizations or individual residents in China” (“author’s remuneration/contingent income paid/borne within China”) shall also be deemed as income sourced from China regardless whether the place of payment is in China (“payment-place-regardless provision”). However, in the officially promulgated 2018 IRs, the aforementioned 3 types of income are excluded from the “payment-place-regardless provision”. We understand that the reason may be that the “payment-place-regardless provision” intends to grant the Chinese government the power to levy tax on certain types of income, however,
In the case of “business operation income”, on the one hand, “independent personal services terms” of relevant tax treaties generally stipulate that income derived by an individual who is a resident of a contracting state in respect of professional services or other activities of an independent nature shall be taxable only in that contracting state, unless he/she has a fixed base regularly available to him/her in the other contracting state for the purpose of performing his/her activities or he/she is present in that other contracting state for a period or periods exceeding 183 days cumulatively in a calendar year (or any 12 months) concerned. That is to say, the internationally agreed common basis to judge attribution of taxation power is mainly “fixed base standard” and “time standard”, rather than “payment place standard”. On the other hand, “carrying out business activities” is usually “performing contracts”. In this regard, the provision “income derived from personal services provided in China due to taking office, being employed, performance of contract, etc.” in this Article already covers the main scope of “business activities”, therefore, the necessity of listing “business operation income” separately among the “payment-place-regardless provision” is reduced.
In the case of “equity capital gains”, “capital gains terms” of tax treaties stipulate rules to attribute taxation powers for immoveable properties, equity interest and other properties. Since in China international law usually prevails over domestic law, the “payment-place-regardless provision” rule for “equity capital gains” is highly substitutable (by tax treaties) and is therefore finally not included in 2018 IRs.
In the case of “author’s remuneration/contingent income paid/borne within China”, on the one hand, as for “author’s remuneration/contingent income paid within China”, the wording itself has indicated “paid within China”. If such circumstance would be included in “payment-place-regardless provision”, it will be logically not self-consistent. On the other hand, as for “author’s remuneration/contingent income borne within China”, this may refer to the situation in which domestic entity pays to overseas enterprise and then overseas enterprise pays to overseas individual. When domestic entity pays to overseas enterprise, relevant overseas enterprise may be subject to PRC Enterprise Income Tax (“EIT”). If relevant overseas individual would also be required to pay PRC IIT on such “income sourced from China indirectly”, it is difficult for PRC tax authorities to enforce “long-arm jurisdiction”. Therefore, it is advisable not to prescribe such a clause.
In the Revision, the term “properties such as buildings, land use rights” is changed to “properties such as immovable property”. Technically speaking, such a revision expands the covered scope of “payment-place-regardless provision” (for detailed analysis, please refer to the section entitled “F. Discrimination and analysis of the word ‘ETC.’” in this article).
Adjusting scope of income according to the new IIT Law
HW comments:
In the officially promulgated 2018 IRs, the scope of “business operation income” has been adjusted to some extent in comparison to Exposure Draft of the IRs: (1) “Income generated from production and business operation by IICH” and “Income generated from production and business operation of sole-proprietorship enterprise or partnership enterprise registered in China derived by the investor of such sole-proprietorship enterprise or the partner individual of such partnership enterprise” are presented separately, no longer emphasizing “IICH registered in China”. (2) 2018 IRs no longer requires “holding a license” for the income derived by an individual from engaging in educational, medical, consulting and other compensated services. In this regard, since “income generated from personal services” also includes “compensated services” such as “medical” and “consulting” services, if “holding a license” is no longer a criterion to distinguish “business operation income” from “income generated from personal services” (IIT rates of the 2 types of income are different), it is necessary to make specific judgment to differentiate them based on factors such as service frequency (incidental/regular/daily), business size (whether hiring assistants/apprentices) and accounting method (simple accounting/normal accounting) of the compensated services. In practice, there might be disputes on the differentiation between the 2 types of income between taxpayers and tax authorities. At present, the Tax Computation Measures for IIT on IICH (Revised in 2018) treats “individuals engaged in educational, medical, consulting and other compensated services approved by government departments” and “other individuals engaged in individually-owned production and business operation” as “IICH”. After the promulgation and implementation of 2018 IRs, the aforementioned Tax Computation Measures for IIT on IICH may need to be amended to reflect the legislative changes.
Comparing to 2011 IRs, in the officially promulgated 2018 IRs, the provision “income derived by an individual engaged in contracted operations and leasing operations as well as subcontracting and sub-leasing operations” no longer includes “income of wages and salaries derived by individuals on a monthly basis or for each project” as a part of “business operation income”. That is to say, the provision of “items being deemed as business operation income” is cancelled.
In the Revision, the “shares of properties in partnership enterprises” is clearly defined as one item of the “income generated from transfer of properties”. This is a legislative confirmation of the taxable nature for the transfer of property in partnership operation situation.
In the Revision, “news” and “broadcasting” are deleted from the list of “income generated from personal services”. We understand that this should not be interpreted as an individual engaged in “news” and “broadcasting” industries are not allowed to obtain “income generated from personal services”. In addition, in taxable items of “income generated from lease of properties” and “income generated from transfer of properties”, “buildings” and “land use rights” are combined as “immoveable properties” (the scope of “immoveable properties” is greater than the scope of “buildings” plus the scope of “land use rights”).
In the officially promulgated 2018 IRs, the provisions for “income of interests and dividends” basically remain the same as that in 2011 IRs, stipulating that it refers to “income of interests and dividends derived by individuals in relation to their possession of creditor's rights, equity interests and etc.” The wording “income of interests and dividends nature” in Exposure Draft of the IRs is not adopted (the wording “… nature” implies discretionary power of tax authorities to determine certain types of income as certain taxable income). Nevertheless, it should be noted that the wording “etc.” is added after the term “possession of creditor's rights and equity interests”, which may lead to disputes between tax authorities and taxpayers in the practice of tax collection and administration on the meaning of “etc.” (for detailed analysis, please refer to the section entitled “F. Discrimination and analysis of the word ‘ETC.’” in this article)
In the officially promulgated 2018 IRs, it is stipulated that “If the specific category of taxable income derived by individuals is difficult to be classified, it shall be determined by the State Council’s taxation department.” In comparison, in 2011 IRs and Exposure Draft of the IRs, for “the specific category of taxable income derived by individuals difficult to be classified”, it shall be “determined by tax bureaus in charge”. That is to say, 2018 IRs recalls the “power to determine the specific category of income” (interpretation power) to the highest level tax department of the PRC. This is a more prudent arrangement than giving such power to tax low level bureaus in charge. Of course, since 2018 Version of the IIT Law removes “other taxable income determined by the State Council ‘s fiscal department” from taxable items, the SAT should not define certain unclear income as “other taxable income”.
“Deemed transfer of properties” rule ultimately not adopted
HW comments:
Exposure Draft of the IRs drew on relevant provisions of the Implementation Regulations for the Enterprise Income Tax (“EIT”) Law of the PRC and introduces the concept of “deemed as sales” into the IIT field, meaning certain activities will be “deemed as transfer of taxable properties” and “transferor is deemed to obtain income generated from the transfer”. However, in the officially promulgated 2018 IRs, such provision is finally not adopted.
Prior to the Revision, tax treatments regarding donation (transfer of properties without obtaining considerations) in IIT field are not consistent in many aspects. For example, taxpayers are deemed as transferors (donors) or transferees (recipients), applicable taxable income items regarding transfer of shares, houses, gifts from enterprises, red envelopes issued online and etc. are categorized differently, and taxation regulations in different provinces are also different in technical positions. You may find such examples listed below for reference (for below, 2018 Version of the IIT Law has cancelled “other taxable income”, and regulation of Hebei Province was abolished in 2015, but other provisions are still valid).
If an individual transfers his/her house without getting compensation, the recipient may need to pay IIT as per “other taxable income” item. (For details, please refer to circular Cai Shui [2009] No. 78).
If individuals distribute cash red envelopes online between each other, such income of recipient is not IIT taxable income and the recipient shall not be subject to IIT. However, if an individual obtains cash red envelopes online from an enterprise, the recipient may need to pay IIT as per “accidental income” item. (For details, please refer to circular Shui Zong Han [2015] No. 409).
If an individual transfers equity shares without getting compensation, tax authority might adjust transferor’s income and the transferor shall pay IIT as per “income generated from transfer of properties” item. (For details, please refer to circular SAT Announcement [2014] No. 67)
Guangdong Province and Hebei Province issued policies stipulating that if an individual obtains equity shares without paying compensation, the recipient shall pay IIT as per “income generated from transfer of properties” item. (For details, please refer to circulars Yue Di Shui Han [2009] No. 940 and Ji Di Shui Han [2009] No. 119).
In regards to activities of individuals conducting non-monetary asset exchange, circular Cai Shui [2015] No. 41 stipulates that if an individual makes investment using his/her non-monetary assets, such activity shall be deemed that the transfer of non-monetary assets and the investment occur simultaneously. Accordingly, the investor is subject to IIT for his/her income “generated” from non-monetary assets as per “income generated from transfer of properties” item. Since the officially promulgated 2018 IRs does not adopt “deemed as sales” rule, tax authority may need to clean up relevant circulars and make a policy choice based on the position of 2018 IRs.
Further stipulating the scope of deduction items
Clarifying the scope of “other deductions”
HW Comments:
2018 IRs clarifies the specific contents of “other deductions determined by the law” as stipulated in 2018 Version of the IIT Law. In fact, before the revision of IIT Law and its implementation regulations, the MOF, the SAT and other departments of the State Council have issued relevant policies stipulating that expenses for paying or purchasing enterprise annuities/occupational annuities (Cai Shui [2013] No. 103, etc.), for paying business health insurance (Cai Shui [2017] No. 39, etc.) and tax-deferred commercial pension insurance (Cai Shui [2018] No. 22, etc.) can be deducted for IIT purposes. However, some of them stipulate deduction under certain ratio, some stipulate deduction under certain threshold amount, some apply to specific pilot areas (ending date of the pilot is also specified), while 2018 IRs does not stipulate any specific provisions regarding the limitations, applicable areas and applicable time period of relevant expense deductions. Therefore, previously issued relevant regulations are subject to appropriate adjustments in accordance with 2018 IRs.
Releasing separate regulation to stipulate the “SAD”
2018 IRs does not include detailed provisions on the operation methods for SAD. The State Council separately issued Circular No. 41 (IMSAD) to elaborate detailed implementation measures regarding SAD. Please refer to the following form for main contents of the IMSAD.
HW Comments:
The SAD items are further deductible items besides basic standard deduction (60,000 yuan/year) and special deductions (basic pension insurance, basic medical insurance, unemployment insurance and other social insurance premiums and housing provident fund, etc.). SAD includes 6 deduction items for expenses of children’s education, continuing education, medical treatment for major illness, housing loan interests or housing rental and elderly supporting. The State Council may adjust scope and standards of the SAD in due frequency according to changes of people’s expenses of education, medical care, housing, pensions and other livelihood expenses.
Due to limitation of tax collection and administration conditions, SAD deduction is currently based on methods of fixed amount deduction and actual expenses deduction within certain limit (1 item is deducted as per actual expenses within limit, and 5 items are deducted at fixed amounts). Correspondingly, the purpose of SAD is mainly to “cut tax” rather than “adjusting disposable incomes”.
In the practice of tax collection and administration, there will arise challenges to resources and capabilities of tax authorities for them to examine authenticity and accuracy of the reported SAD information, to supervise risks of repeated deductions among family members, and to deal with tax refund application at the time of IIT final settlement and payment.
According to Circular No. 41, when taxpayers enjoy SAD treatment for the first time, they shall submit relevant information (including personal information of taxpayer himself/herself, his/her spouse, children, dependents, etc.) to withholding agents or tax authorities. If relevant information changes, they shall promptly provide changed information to withholding agents or tax authorities. It is foreseeable that the submission and storage and confidentiality issues of relevant information require more resources and attention from taxpayers and withholding agents.
In order to implement the new arrangements of 2018 Version of the IIT Law, Circular No. 41 stipulates that relevant government departments and units bear responsibility and obligation to provide SAD related information to tax authorities or assist tax authorities in verifying such information. If relevant government departments and units fail to provide information to tax authorities in due course, the person-in-charge and related personnel shall bear corresponding responsibilities.
According to Circular 41, relevant materials for future inspection shall be retained for 5 years.
In Exposure Draft of the IMSAD, there was a provision stipulating “If a foreign individual meets requirements of SAD on expenses of children's education, continuing education, housing loan interests or housing rental, he/she may claim such deductions, or may choose to continue enjoying current preferential tax treatments for foreigners (i.e., IIT exemption for expenses of children's' education and language training and housing subsidies), but the same type of expenses cannot be eligible for both the SAD and the current preferential tax treatments for a foreigner at the same time.” This provision is not included in the officially promulgated Circular No. 41, but is separately specified to some extent in the Notice on the Effect Linkage of Preferential Policies after the Revision of IIT Law (Cai Shui [2018] No. 164) (“Notice No. 164”) issued by the MOF and the SAT. According to Notice No. 164, during the period from 1 January 2019 to 31 December 2021, if an overseas individual meets conditions of tax resident, he/she may choose to enjoy SAD treatments, or choose to enjoy preferential IIT treatments for foreigners as stipulated before the Revision, but may not choose to enjoy both treatments at the same time. Once the choice was made, it may not change within a tax year. Starting from 1 January 2022, overseas individuals could no longer enjoy IIT exemption for expenses of children's' education and language training and housing subsidies and other tax exemption policies, and could only claim SAD as provided by Circular No. 41.
Other revisions relating to deduction items
HW Comments:
2018 IRs stipulates that “Where an individual who derives business operation income does not have consolidated income, when computing his/her taxable income of each tax year, expenses of 60,000 yuan/year, special deductions, SAD and other deductions determined pursuant to the law shall be deducted (in order to facilitate description below, the aforementioned deduction items are collectively referred to as “Specific Deductible Items”, the “SDI”). In Exposure Draft of the IRs, relevant wording was “For…individual, taxable income is the balance of income of…deducting expenses of 60,000 yuan, special deductions and other deductions determined pursuant to the law.” On the one hand, 2018 IRs adds the provisions of SAD deduction, which is a preferential treatment for business operators. At the same time, relevant provisions in 2018 IRs resolved the inconsistency between the provisions of Article 15 of Exposure Draft of the IRs and the provisions of Paragraph 1(3) of Article 6 of IIT Law and Article 14(1) of Exposure Draft of the IRs on how to calculate business operation income. On the other hand, comparing to Exposure Draft of the IRs, 2018 IRs stipulates that “no consolidated income” is a general precondition for deducting relevant SDI by business operators. Literally speaking, this means that if relevant business operator “has consolidated incomes”, then the SDI can only be deducted when calculating his/her taxable income amount of the consolidated income, and shall not be claimed when calculating his/her business operation income. That is to say, if the amount of consolidated income of relevant business operator is not large enough, in certain circumstances, the loss of tax benefits arising from the loss of eligibility to claim SDI when calculating business operation taxable income will be larger than the tax benefit savings arising from deducting relevant SDI when calculating the consolidated income tax payable amount (i.e. the loss will outweigh the gain). In order to avoid the “passive negative impacts in tax benefits” under specific circumstances, relevant tax regulations may need to be issued to clarify the meaning of the aforementioned provisions.
In addition, in comparison to 2011 IRs, 2018 IRs deleted the provisions about “additional deductible amount” (1,300 yuan/month) that can be claimed by “taxpayers who do not have a domicile in China but receive income of wages and salaries in China or taxpayers who have a domicile in China but receive income of wages and salaries outside China” so as to reflect the changes in 2018 Version of the IIT Law.
Adjusting taxation methods of overseas income and overseas tax credit system
HW Comments:
According to 2018 IRs, as for the consolidated income and business operation income derived within and outside China by a resident individual, tax payable amount shall be computed based on the total income within and outside China for consolidated income and business operation income respectively, while for other income derived within and outside China, tax payable amount shall be computed separately for the amount within and outside China for each type of income respectively. 2011 IRs stipulated that for individuals who have a domicile in China or individuals who do not have a domicile in China but have resided in China for one year or more (i.e., a resident individual), all the income derived within and outside China shall be calculated separately. For consolidated income and business operation income, comparing the “IIT calculation method of combining income derived within and outside China” with the “IIT calculation method of dividing income derived within and outside China”, tax burden on the income derived outside China under the former IIT calculation method under 2018 IRs may be heavier than before.
Exposure Draft of the IRs stipulated that losses of business establishments outside China of sole-proprietorships, partnerships and individuals who are engaged in “other production or business operations” shall not offset against profits of business establishments within China. This provision is deleted in 2018 IRs.
With respect to the limitation on overseas tax credit, 2018 IRs stipulates a calculation method as “aggregate tax credit limitation distinguished according to both the source of income and the taxable items” and stipulates that fiscal and taxation departments of the State Council can adjust the calculation methods for IIT tax credit. Comparingly speaking, in EIT field, starting from 1 January 2017, enterprises can choose method of “tax credit limitation calculated according to source of income regardless of taxable items” or method of “tax credit limitation calculated regardless of source of income and taxable items” to calculate their overseas EIT payable amount to be credited and the credit amount to be offset in China (Cai Shui [2017] No. 84). Such arrangement is conducive for enterprises to make full use of tax credit system, so as to comprehensively use “tax resources” in different jurisdictions to save tax. Therefore, it is worth for fiscal and taxation departments to take an appropriate opportunity to implement an overseas tax credit system that is more conducive to individual taxpayers.
Exposure Draft of the IRs specified the specific calculation formula for the credit limitation, but in the officially promulgated 2018 IRs, the formula is not included.
Weighing and considering new rules of tax collection and administration
Detailed provisions of anti-tax avoidance rules are not included in 2018 IRs
HW Comments:
2018 Version of the IIT Law introduces 3 types of anti-tax avoidance rules (i.e., Transfer Pricing Adjustment Rule, Controlled Foreign Enterprise Adjustment Rule and General Anti-tax Avoidance Rule), and Exposure Draft of the IRs refined the provisions relating to these 3 types of anti-tax avoidance rules. On the one hand, Exposure Draft of the IRs clarified the meaning of “related parties”, “arm’s length principle”, “control”, “actual tax burden is obviously low”, “no reasonable commercial purposes”, on the other hand, it stipulated specific calculation method of tax interests for the adjusted tax payment amount. However, such provisions are not included in the officially promulgated 2018 IRs.
Comparing with other tax collection and administration arrangements, the formulation and implementation of anti-tax avoidance rules should be “more of technical level”. When technical preparation is not mature, it may not be appropriate to make provisions. Under such circumstances, it may be a more flexible way to issue relevant operational procedures by fiscal and taxation departments of the State Council.
It is particularly important to note that under the CRS (Common Reporting Standard of Overseas Financial Account Information Exchange) mechanism, tax authorities have power to obtain information on overseas financial assets of a large number of Chinese resident individuals through cross-border bulk information exchange channels. Accordingly, tax authorities may initiate a large number of tax adjustment surveys on relevant individuals. In this regard, high net value individuals having overseas corporate structure and other financial assets should re-examine their existing investment structure and enhance their tax compliance awareness and capabilities.
Adjusting collection and administration rules of tax declaration
HW Comments:
2018 Version of the IIT Law made a number of modifications to tax collection and administration arrangements. 2018 IRs refines these provisions, including: (1) Clarifying circumstances in which taxpayers obtaining consolidated income need to do final settlement and payment of IIT, and providing relating to tax refund; (2) Stipulating the approach to claim SAD during tax collection and administration procedures and the requirements to retain relevant documents; (3) Stipulating that taxpayers may delegate withholding agent, other institutions or individuals to handle the final settlement and payment of IIT; (4) Stipulating that if withholding agent did not turn over the withheld tax to the treasury of the country, this situation shall not affect taxpayer's application for tax refund, etc.
Exposure Draft of the IRs stipulated that, tax authorities may not accept tax refund application declared after closing of the final settlement and payment of IIT. However, according to Article 51 of the Tax Collection and Administration Law of the PRC (“TCA Law”), where a taxpayer discovers that tax payment is in excess of tax payable amount, the taxpayer may, within 3 years from the date the payment is made, claim a refund of the excess payment plus interests accrued according to bank interest rates, and tax authorities shall immediately pay back the money upon examination and verification of the case. It is clear that Exposure Draft of the IRs’ stipulation that tax authorities may not accept tax refund cases after closing of the statutory final settlement and payment period of IIT, conflicts with the superior law (TCA Law) and this provision improperly restricts taxpayer's right to apply for tax refund. Fortunately, this provision is not adopted in the officially promulgated 2018 IRs.
Furthermore, the officially promulgated 2018 IRs deleted relevant provisions relating to “resident individuals who cancel their Chinese household registration due to emigration shall report certain information to taxation authorities” and relevant provisions of “how to pay tax and make final settlement and payment of IIT if it is not certain that a taxpayer is a resident individual or a non-resident individual” as previously provided in Exposure Draft of the IRs. Relevant tax collection and administration rules may be issued separately.
In addition, the officially promulgated 2018 IRs also deleted relevant provision of “taxation authorities shall not levy IIT on certain IICHs, sole-proprietorships or partnerships by way of collecting a fixed amount for a certain regulated period or by way of deeming a tax in advance.”
Discrimination and analysis of the word “ETC.”
Comparing with 2011 IRs, the frequency of the word “etc.” has increased significantly in relevant provisions of 2018 IRs. The word “etc. (等)” has 2 meanings in Chinese in relevant situations. One meaning is to end contents mentioned earlier. For example, the word “etc.” in the expression “Special Administrative Regions include Hong Kong, Macau, etc.” is to end the enumeration, meaning Special Administrative Regions only include Hong Kong and Macau. The other meaning is to extend contents mentioned earlier, meaning the examples have not been exhaustively enumerated. For example, the word “etc.” in the expression “Nobel Prize winners include Tu Youyou and etc.” is to extend the scope of the Nobel Prize winners, meaning Tu Youyou is not the only one who won the Nobel Prize. Therefore, there may be differences in people’s understanding when we talk about the word “etc.” Particularly, as for tax laws and regulations, the interpretation of “to end relevant contents” or “to extend relevant contents” will lead to different legal and economic consequences. Accordingly, when the word “etc.” appears in the tax laws and regulations, it is necessary to interpret prudently from the aspects of logical meaning, rule attributes, legislation purposes and etc. so that tax authorities and taxpayers can reach a consensus on legal consequences of specific rules to the maximum possible extent. In the following contents, we try to discriminate and analyze the meaning of the word “etc.”, hoping to help reach a consensus in relevant disputes. Please refer to our comments in the following tables for details.
In 2011 IRs, the word “etc.” appears twice in total, which are set forth as follows:
In the officially promulgated 2018 IRs, the word “etc.” appears 8 times in total (in 7 articles), which are set forth as follows:
Other revisions
2018 IRs also revised some of the wordings in relevant provisions. In addition, Article 7 of 2018 IRs stipulates that measures of collecting IIT on the proceeds of stock transfer shall be separately prescribed by the State Council and such measures shall be reported to the Standing Committee of the NPC for record. 2011 IRs stipulated that the measures of collecting IIT on the proceeds of stock transfer shall be separately formulated by fiscal department of the State Council and submitted to the State Council for approval. Obviously, under 2018 IRs, legislative grade of IIT on the proceeds of stock transfer will be improved.
Our Services
Taxpayers shall pay tax according to laws. This means, “paying tax” is an obligation for taxpayers while “according to laws” is a right for taxpayers. In order to act according to laws to protect legal rights, taxpayers need to have a comprehensive and deep understanding of tax laws and regulations. In this connection, Haiwen tax team is committed to providing the following professional services from “Tax + Law” standpoint in response to clients’ such needs:
Daily tax consulting services;
Tax structuring services;
Preparation, review and revision of tax related terms in contracts;
Legal support services in tax disputes;
Tax compliance services.
If you are interested in learning more about our services, fee quotations and other related issues, please contact the following persons:
Guo Yongmao (Tax Partner)
E-mail: guoyongmao@haiwen-law.com
Li Yang (Senior Associate)
E-mail: liyang@haiwen-law.com
Tian Yue (Associate)
E-mail: tianyue@haiwen-law.com
Beijing ICP No. 05019364-1 Beijing Public Network Security 110105011258
