Taxpayers with Annual Income

China Taxation Service
Hotline: 86-755-82143348, Email:anitayao@citilinkia.com

Recently, the State Administration of Taxation issued a notice, clarifying the provisions on tax self-declaration for individuals with annual income of Over RMB120,000 and providing more specific rules concerning the provisions on the self-declaration of relevant taxable income items. Since some readers do not understand relevant provisions well and even think mistakenly that the state would resume individual income tax on stock transfer, the reporter recently paid a visit to the State Administration of Taxation. Relevant principals of the administration answered questions on this issue raised by the reporter.

Q: Does an individual with annual income of Over RMB120,000 need to pay more tax if he or she declares taxes at the end of a year?

A: Because China has adopted the comprehensive declaration method under the schedular tax system, as long as taxes have been withheld or paid in full by an individual when obtaining the income, he/she does not need to pay more taxes but needs to submit the Individual Income Tax Declaration Form (applicable to taxpayers with annual income of Over RMB120,000) and a copy of ID card according to the requirements when declaring taxes at the end of a year.

Q: Why does an individual with annual income of Over RMB120,000 need to declare taxes at the end of every year even though he/she has paid the tax in full when obtaining the income?

A: Individual income tax is levied mainly by withholding the tax. Before the amendment of the Law on Individual Income Tax, people with high income were not legally obligated to declare taxes by themselves. After the amendment, any individual with annual income of Over RMB120,000 shall bear the obligation of self-declaration, no matter whether he/she has paid the tax in full. As for individuals with annual income of Over RMB120,000, if the withholding agent does not withhold taxes or fails to withhold all taxes and individuals have no obligation of declaration, it will be hard to determine the legal responsibility of taxpayers who fail to pay payable taxes, and the enforcement of tax law and the compliance of taxpayers with tax law will be affected.

Whereas China has adopted a classified individual income tax system, the Standing Committee of the National People’s Congress amended the tax law to obligate high-income individuals to declare taxes by themselves. First, this will help cultivate the taxpayers’ consciousness of paying taxes in good faith, clarify the legal responsibilities of taxpayers and enhance the compliance with tax law; second, it will help the tax authorities strengthen the administration of tax sources and the regulation of individuals with high income; third, it will help strengthen comparative analysis and further push forward the scientific and sophisticated administration of individual income tax; fourth, it will help create conditions and accumulate experience for the transition to a mixed tax system that combines global and schedular  tax systems in the next step. This is also in conformity with the common practice of various countries in respect of individual income tax.

Q: The State Administration of Taxation has issued a document to clarify the provisions on the self-declaration of income from stock transfer. Does it mean China will levy individual income tax on income from stock transfer?

A: It is wrong. According to the Law on Individual Income Tax, the income from stock transfer belongs to the taxable item “income from transfer of property” and individual income tax shall be paid at a rate of 20%. However, in order to support the restructuring of China’s enterprises and push ahead the healthy development of domestic securities market, with approval of the State Council, the Ministry of Finance and the State Administration of Taxation issued the Circular on Temporary Exemption of Income from Stock Transfer from Individual Income Tax (CSZ[1994] No.040), the Circular on Temporary Exemption of Income from Stock Transfer from Individual Income Tax in 1996 (CSZ[1996] No.12), and the Circular on Continuing the Exemption of Income from Stock Transfer from Individual Income Tax (CSZ[1998] No. 61) in June 1994, December 1996 and March 1998 respectively, stipulating that the income from stock transfer is temporarily exempt from individual income tax after 1994.

The 2005 newly revised Implementing Rules of the Law on Individual Income Tax stipulate that individuals with annual income of Over RMB120,000 shall declare taxes to the tax authority by themselves. The annual income includes the income from stock transfer by individuals. Taxpayers with annual income of Over RMB120,000 are exempt from individual income tax on the income from stock transfer, although they shall declare the income from stock transfer to the tax authority by themselves. The self-declaration of income from stock transfer and whether to levy the tax are two different matters.

Q: In which way can individuals inform the tax authority of the income from stock transfer when declaring taxes?

A: When filling out the Individual Income Tax Declaration Form (applicable to taxpayers with annual income of Over RMB120,000), individuals having received income from stock transfer shall mark “stock: amount” behind the income from transfer of property in the “domestic” column corresponding to “9. income from transfer of property” so as to distinguish the taxable income and tax-free income and simplify the calculation of taxes.

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