2024.10.26

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introduction：执行力度提高是趋势。

Author: First Financial News Qi Ning

Recently, information such as "China to impose taxes on high-net-worth individuals with Chinese nationality globally," "the threshold is $10 million," and "overseas listed company shareholders are affected" has garnered widespread attention both domestically and internationally, reigniting rumors of China's proposed "overseas rich tax."

据第一财经了解，我国“全球征税”一直有政策法律依据，2020年出台的相关规定为具体执行做好了制度准备，且在当时已引起过一轮关注。而自2019年开始实施的一份配套文件中，对在中国境内无住所的个人设置了6年“豁免期”，当前距离首次到期时间渐近。（See the report: "Will China impose a 'tax on overseas rich'? Lawyers: Policy and law have always been in place, global taxation is the general trend."》）

In the eyes of many tax law professionals, based on tax law theory, international experience, as well as the actual situation of the improvement of relevant laws and regulations and social and economic development in China, global taxation is an inevitable trend. The impact of its advantages and disadvantages should be objectively viewed. However, China currently lacks specific detailed rules for taxing the foreign income of resident individuals, and coupled with limited past enforcement, the public's understanding of China's individual income tax policy is not comprehensive. In response to the recent hot issues of concern both domestically and internationally, First Financial News further interviewed experts in the relevant fields.

Li Xiaorong, Vice Dean of the School of Public Finance and Taxation at Central University of Finance and Economics, told the First Financial Daily that the high attention and heated discussions both domestically and internationally on the above topics precisely illustrate the importance of the public correctly understanding China's tax system. He believes that the lax taxation of residents' overseas income in the past was due to multiple objective reasons, and the trend of increasing enforcement is inevitable in the future, but there are still many difficulties to overcome. In terms of impact, just as the practices of other countries internationally have shown, the future implementation of strict global taxation will also be a "double-edged sword."

Correctly understand my country's personal income tax policy

Recently, rumors that China will impose a "tax on overseas wealthy individuals" have sparked heated discussions both domestically and internationally, primarily due to misunderstandings or misinterpretations of the current personal income tax policies in China. Li Xiaorong believes that the widespread attention to this rumor from various parties both domestically and internationally reflects the high level of concern among the Chinese populace regarding taxation issues for high-net-worth individuals. It also underscores the significance of China's tax system changes and related interpretations on a global scale.

He stated that at the level of the individual income tax system, China simultaneously implements resident jurisdiction and territorial jurisdiction. Resident jurisdiction stipulates that all income of Chinese resident individuals worldwide must be subject to individual income tax in China. Therefore, China has the right to tax the overseas income of high-net-worth individuals with Chinese nationality who meet the criteria for resident individual taxpayers globally, a practice that has been well-founded historically.

First Financial News noted that in a case of tax filing service and risk warning released by the General Office of the State Taxation Administration this month, it was clearly stated that the basic system requiring residents to declare and pay taxes on their foreign income on their own has been consistently upheld since the implementation of the Individual Income Tax Law in 1980. The newly revised Individual Income Tax Law in 2018 continues this provision, meaning that residents' income from both within and outside China should be subject to individual income tax in China according to law.

According to the Seventh Amendment of the Individual Income Tax Law, taxpayers of individual income tax in China include resident individuals and non-resident individuals. The former refers to individuals who have domicile in China, or who do not have domicile but have resided in China for a total of 183 days or more within a tax year. The latter refers to individuals who have no domicile and do not reside in China, or who do not have domicile but have resided in China for less than 183 days within a tax year. Resident individuals shall pay individual income tax on income derived from both within and outside China in accordance with this law, while non-resident individuals shall pay tax on income derived from within China.

In the year, the "Regulations for the Implementation of the Individual Income Tax Law of the People's Republic of China" (hereinafter referred to as the "Implementation Regulations") were revised in tandem, which provided partial "exemption rights" for taxation of foreign-sourced income of individuals without a domicile in China. In January and April of the same year, in order to implement the requirements of the above two legal documents, the Ministry of Finance and the State Taxation Administration jointly issued the "Announcement on the Criteria for Determining the Residence Time of Individuals Without a Domicile in China" (hereinafter referred to as the "Criteria") and the "Announcement on Individual Income Tax Policies Related to Foreign-Sourced Income (Announcement No. 9 of the Ministry of Finance and the State Taxation Administration in 2019)" (hereinafter referred to as "Document No. 9"). The former further clarified the standards for the "exemption rights" stipulated in the "Implementation Regulations," while the latter detailed the scope of taxation, tax objects, and methods of tax reporting.

Li Xiaorong believes that in the face of the increasingly complex international economic environment, to achieve economic and social development goals, China continuously improves its tax system and deepens international cooperation, with the international influence of its tax system gradually increasing.

There are objective reasons for lax enforcement

First Financial News previously learned in an interview that although the document explicitly states that it applies to tax processing matters for annual and subsequent years, considering factors such as economic development and preventing capital outflows, China's implementation of policies on individual income tax for overseas residents has not been strictly enforced in the past. This is considered another background for the current lack of more detailed implementation rules and the close attention to related topics. At present, many details in the rumors do not have authoritative policy bases.

Li Xiaorong told Yicai that in recent years, China has consistently worked to improve the personal income tax law and its implementing regulations, but full enforcement has not been completely achieved in policy implementation, primarily due to objective reasons related to tax collection.

First, the global taxation of personal income tax requires tax authorities to verify the income information of resident taxpayers worldwide. Effective supervision and taxation of foreign-sourced income necessitate a robust international information-sharing and collaboration mechanism, as well as comprehensive international cooperation rules and procedures. Currently, tax authorities struggle to fully grasp the foreign-sourced income of resident individuals. Second, economic globalization has led to tax competition among countries. The tax incentives and provisions such as double taxation avoidance agreements arising from tax competition have increased the complexity of policy implementation, said Li Xiaorong.

First Financial News noted that Article 7 of the Individual Income Tax Law clearly stipulates the tax credit provision for foreign-sourced income, which means that resident individuals who have earned income from outside China can credit against their taxable income the individual income tax already paid abroad, but the credit amount shall not exceed the taxable amount calculated according to the provisions of this law for the taxpayer's foreign-sourced income. The Implementing Regulations further explain the above-mentioned credit limits and time limits, and the circular also refines the credit provisions and provides a specific formula for calculating the credit limit.

From the perspective of the current international community's measures on global taxation, most developed countries have established systems for taxing the foreign income of their tax residents, and multiple countries have signed and implemented the "standards" proposed by the Organization for Economic Cooperation and Development (OECD), sharing relevant property information of taxable residents.

Xiao Sa, Senior Partner at Dentons Beijing, previously stated that the number of countries and regions committing to implementation has reached a certain figure, and the number of jurisdictions that have confirmed exchanging information with Mainland China (implementing the agreement in practice) has reached a certain figure as well. According to the standard, information such as residents' personal offshore institutional accounts, personal offshore asset information, and personal basic information will be exchanged with Chinese tax authorities.

Li Xiaorong believes that with the improvement of international tax cooperation mechanisms and the expansion of the tax information exchange network, the interaction and linkage of tax-related information are increasingly strengthened, and the enforcement of global individual income tax collection in China may be enhanced.

The "exemption period" in the year involves dual policy considerations.

In accordance with the "Implementation Regulations" and the "Criteria for Determination," individuals without a domicile in China may, starting from the specified date, be eligible for a tax "exemption period" of up to five years, provided they meet certain conditions.

Simply put, the implementation of the relevant provisions means that, starting from the year and thereafter, if a non-domiciled individual continuously stays in China for a full 183 days each year for consecutive years without any single departure exceeding 90 days in any one year, they will be required to pay taxes on their foreign income from the beginning of the year; if the conditions are interrupted in any year, the individual will continue to be exempt from personal foreign income tax in the year.

Li Xiaorong told Yicai that the "exemption period" clauses in the two documents are designed to guide resident individual taxpayers without a domicile in China to gradually adapt to the global tax policy, reducing the resistance to policy implementation.

On one hand, the "exemption period" policy can attract more talents and investors to work and invest in our country; on the other hand, the "exemption period" policy also provides a transition period for individual taxpayers without a residence in China to adapt to China's personal income tax system and for tax authorities to improve relevant tax administration measures, said Li Xiaorong.

After the "exemption period," which groups and aspects will be affected by taxation? Li Xiaorong highlighted three points: Firstly, individual taxpayers without a domicile in China need to report worldwide income, which will increase the tax costs for relevant groups, affecting investment and residence decisions. Secondly, the implementation of global taxation leads to an increased demand for tax planning, increasing the need for professionals in tax consulting and planning services, thereby affecting practitioners in the tax consulting and planning industry. Thirdly, China's tax authorities need to strengthen international tax cooperation and exchange of tax information to facilitate the verification of overseas income information of residents.

Rational Understanding of Global Taxation: A Trend, but Also with Challenges

With rumors and public opinion resurfacing, the future trend of global taxation in our country has become a focus of attention both domestically and internationally. Many views hold that, whether from the perspective of tax law theory and international experience, or from the perspective of the improvement of our country's laws and regulations and the stage of social and economic development, global taxation is an inevitable trend, and strictly enforcing taxation following the practices of most developed countries is only a matter of time.

Li Xiaorong believes that global taxation, by enhancing international tax cooperation, promotes the reform and construction of the global governance system, contributing to the fair, stable, and sustainable development of the global economy. The trend of global taxation in our country is to draw on the global taxation regulations of developed countries, strengthen the tax management of overseas income for tax residents, and gradually align with international tax rules.

On one hand, our country will continue to clarify the legal basis for the taxation of residents' income both domestically and internationally, strengthen international cooperation and tax information exchange, enhance the supervision of cross-border tax avoidance behaviors, and crack down on international tax evasion; on the other hand, our country will continuously improve the digitalization level and intelligent upgrading of tax collection and administration, adhere to the rule of law in taxation, optimize tax enforcement methods, and ensure the accuracy and standardization of global taxation. He further stated.

However, there are still many challenges to overcome. Li Xiaorong emphasized that the difficulties in China's implementation of global taxation mainly fall into four categories: the first is information verification, where tax authorities struggle to verify the overseas income information of resident individual taxpayers, requiring international cooperation and a network for tax information exchange to provide information support; the second is tax avoidance supervision, where the tax avoidance behaviors of resident individual taxpayers require coordinated cooperation and joint supervision among countries; the third is institutional means, where China's tax collection and management system and technology are relatively lagging, and further optimization is needed; the fourth is ideological concepts, where to adapt to the tax model and collection and management needs of global taxation, it is necessary for taxpayers and tax authorities to build new-era tax concepts.

Dialectically view the "two sides" of the impact of global taxation.

Under the wave of economic globalization, it is only right and proper to levy individual income tax on residents' overseas income. However, based on international experience, the impact of global taxation is a "double-edged sword," with both positive and potentially negative aspects.

Li Xiaorong believes that, on balance, global taxation has positive implications for promoting international cooperation, combating tax evasion, and enhancing tax fairness, but it may also exacerbate tax conflicts between countries, highlight mismatches in tax administration technology, systems, and concepts, and increase the tax compliance costs for small and medium-sized enterprises.

From a positive perspective, first and foremost, global taxation promotes international cooperation. He cited the US's Foreign Account Tax Compliance Act (FATCA) as an example, stating that this act established a financial information collection system specifically targeting US taxable residents' overseas financial assets. By enhancing international tax information exchange and comparison, it reduces international tax evasion and avoidance, contributing to the improvement of global tax governance.

Secondly, global taxation will combat international tax avoidance. For example, the European Council has passed the EU Minimum Tax Directive, requiring member states to convert the directive into national law by the end of the year and implement the Income Inclusion Rule starting next year, and the Low-Tax Payer Rule starting in 2024. "The European Council's positive response to the 'Pillar Two Proposal' (the minimum tax component of international tax reform) will ensure a minimum tax level within the EU, weaken the problem of tax competition to the bottom, and reduce international tax avoidance," said Li Xiaorong.

Again, global taxation would enhance tax fairness and reduce base erosion and profit shifting. For example, Singapore and Hong Kong, China, plan to implement global anti-base erosion rules starting from the year, in response to the global minimum tax requirements under Pillar Two of the "Two Pillars" proposal. Li Xiaorong stated that these regions typically attract foreign investment with lower tax rates, and the implementation of global taxation would promote global tax fairness and create a more equitable international competitive environment.

However, global taxation inevitably brings negative effects, the first of which is exacerbating conflicts between countries over taxation. Li Xiaorong mentioned that the EU proposed a tax on digital service income, which was opposed by the U.S. government. The tax conflict between the EU and the U.S. over digital service taxes shows that global taxation requires enhanced international tax coordination to reasonably balance the tax interests of countries.

Secondly, the technology, systems, and concepts of tax collection and administration are lagging, unable to adapt to the complex global tax model. For example, Brazil's personal income tax rate adopts a progressive tax rate on excess, setting different tax rates for different income brackets, resulting in a complex tax structure. Additionally, the country's strict tax audit system leads to a large number of tax litigation cases with lengthy durations.

Li Xiaorong believes that in the complex and ever-changing international economic environment, the principle of global taxation could lead to more international tax administration issues and generate a large number of tax litigation cases. "The governments of South Africa and India are also pushing for tax system reforms, reshaping the tax concepts between the tax authorities and taxpayers within their countries, simplifying the tax administration system, and improving the efficiency of tax collection and management," he cited as an example.

Again, global taxation could impose additional tax compliance costs on small and medium-sized enterprises (SMEs). For example, in Russia, the country began to levy personal income tax on the income of remote workers under labor contracts in that year. Li Xiaorong believes that this policy requires SMEs with remote employees to ensure the correct withholding and reporting of these employees' personal income tax, which directly affects the tax compliance and tax burden levels of these SMEs.

“我们需要辩证地看待全球征税带来的双重影响，在减少消极影响的基础上，扩大积极影响的效果，在确保税收公平和效率的同时，寻求互惠互利的解决方案。”李小荣建议。 WeChat editor | 生产队的驴（周末不打烊版）
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