China Individual Income Tax - Tax Self-Declaration by Taxpayers with Annual Income of Over RMB120,000 -- China Business -- kaizen
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China Individual Income Tax - Tax Self-Declaration by Taxpayers with Annual Income of Over RMB120,000

1: 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.


2: 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.


3: 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.


4: The State Administration of Taxation has issued a document to clarify the provisions on the declaration of income from stock transfer. What are the considerations?


A: According to the stipulation of the tax law, stocks are the property of individuals, and the income from stock transfer is treated as the "income from transfer of property". In Article 22 of the Implementing Rules of the Law on Individual Income Tax of the People's Republic of China, it is defined that "the tax on the income from transfer of property shall be calculated and paid according to the balance of income from one-time property transfer minus the original value of property and reasonable expenses"; therefore, the current tax law stipulates that the taxation on the income from stock transfer is based on the times the income is generated. Under the current schedular tax system, the income generated at different times shall not offset each other, that is to say, all income shall be taxed, and no tax is imposed if no income is generated. As China currently exempts the income from stock transfer from individual income tax, while studying the declaration of income from stock transfer, the State Administration of Taxation considered the following points: an individual may engage in stock trading frequently in a tax year, so asking the individuals to record the income from every stock transfer will no doubt make tax self-declaration more difficult; meanwhile, since there are uncertainties about the profit and loss from stock trading within a tax year, when clarifying the provisions on the declaration of income from stock transfer, it is clearly stipulated that if the gain from stock transfer exceeds the loss from stock transfer within a tax year, the balance shall be included in RMB120,000; in view of the fact that some taxpayers actually belong to the high-income group as they have annual income of more than RMB120,000 from taxable income items other than the income from stock transfer, we stipulate that if the loss from stock transfer exceeds the gain from stock transfer, the minus amount shall be zero, in order to prevent high-income people from offsetting of other income items in excess of RMB120,000 and to strengthen the monitoring of tax sources.


5: 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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