Impact on Companies and Individuals under China New Tax Reform

Led by Premier Li Keqiang, the Ministry of Finance and the State Administration of Taxation issued a series of new policies at the turning of year 2022,  China will extend tax and fee cuts for business entities, provide targeted support to the service sector and other industries that are heavily impacted by the pandemic, and extend preferential individual income tax（IIT）policies. 

Yet we have to say that the just arrived 2022 is likely to be the most heavily regulated year.  2021, the pandemic has further promoted digitalization and information sharing, China has ushered into the era of big data regulation facilitated by The Golden Tax System (GTS) Phase IV and make business environment increasingly transparent and standardized. Various tax laws and policies have been introduced, and compliance requirements are upgraded. At the year end of 2021, a fact triggered by the big penalty of over RMB 1.3 billion Yuan as result of imposed fine on tax evasion of the top network anchor HuangWei (screen name: Wei Ya) has revealed that in the post pandemic era, tax planning has become a big issue that businesses and individuals have to consider no matter for the purpose of utilizing preferential tax policy for tax reduction or risk prevention. 

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What does GTS Phase IV Mean to Companies and Individuals

The Feature of GTS Phase IV

• As an upgraded version of GoldenTax iii, the government not only strengthens the overall monitoring of the tax system, but also pushes companies to take the initiative to properly regulate social security payment  

  
  

• Transformation from “managing tax through invoice” to “managing tax through big data”.  Make full use of big data and artificial intelligence to achieve comprehensive business, process and intelligent "data portrait" of tax payers  
  
  
• One platform allows banks to share tax information and enables nationwide tax management & collection services 

What are the Main Risks under GTS Phase IV?

Key inspection of 9 types of companies

Impact on Companies

The GTS Phase IV carry outoverall matching and risk identification by integrating the data on business, legal person and other aspects of companies.  At the same time, it connects comprehensively with financial institutions, payment platforms to monitorthe funds flow of companies and individuals more in-depth, there is no chance of escape for tax issues. For instance:  

• It further promotes a real-name system for corporate accounts, whereby fake accounts are inevitably exposed 

• Verification and monitory scope on corporate income is expanded, especially when legal persons and their relatives receive payment on behalf of the companies via their personal bank accounts, WeChat pay, Alipay and accounts on other platforms

• Companies that evade tax via their private accounts automatically face scrutiny: individuals with one bank card involved in the case will be banned from opening new accounts for five years, mobile payments will be banned and considered as corporate credit problems

Impact on High-net-worth Individuals (HNWIs)

• The government introduced tax identification number for individuals and anti-tax-evasion clauses in the new IIT law for the first time, making the income and expenditure of individuals in China more transparent.  

• Tax authorities already have more channels to exchange information than just CRS for global inspections on offshore assets and earnings. More and more countries and regions are participating in information exchange. The transparency of overseas assets is exerting a strong impact on the asset allocation and wealth management structure of Chinese HNWIs.  The replanning on asset security, privacy protection, reasonable tax avoidance and inheritance of wealth has becomeone of the major demands of HNWIs.  

For both companies and individuals, as the upgrading compliance requirements and cost of penalties are getting higher and higher, starting the renovation as soon as possible can help with risk avoidance and tax savings.

For companies, good tax planning must be done in advance of the occurrence of capital flow.  Whether in the start-up, development or mature stage, companies are suggested to plan on the structuring, the establishment of headquarters, spinoff & reorganization, location of branch office registration, etc.  The focus of GTS big data analysis and inspection, such as revenue, cost, profit, inventory, bank account and tax payables, are part of the self-inspection points that companies should pay close attention to.  

At the same time, companies should also consider the individual income tax (IIT) planning of founders and executives. In the IIT, wages and salaries are an important part and calculated with progressive tax rate. Therefore, how to reduce the tax burden by planning incompliance with tax law; how to reasonably plan the categories of individual income,and whether adopting the structure of partnership shareholding platform (which was once favored by tax planning) is still applicable to reduce the tax burden of dividends under the new tax reform are all important issues facing by companies.  

Under the big context of globalization and regionalization, uncertainties in economy, politics and living environment (virus iteration, natural disasters, etc.) give rise to new demands: diversified investment, global asset allocation, cross-border investment and financing, etc., have all become alternative ways to disperse risks.  More and more companies and HNWIs intend to register and conduct investment & financing activities in low-tax or tax-free regions. However, in the new innovative economy, the transformation of business, management and organizational models along with the digital transformation, and the coming of the era of gig economy bring new challenges to the tax planning.  How to make better use of various structures, tools and policies to carry out reasonable and legitimate planning has become a new topic that worth exploring.