The State Administration of Taxation (SAT) recently released to the public a circular (Guoshuifa [2005] No 120), originally issued on 6 July 2005, that sets forth Administrative Rules on Individual Income Tax (IIT) and requests the tax authorities at all levels to implement the rules strictly with effect from October 1, 2005. Provincial tax authorities may implement the rules based on their execution measures.

The circular aims to enforce and regulate the IIT collection, with a view to achieving full income reporting by the entire population, ie, reporting and recording of all income, regardless of amount, by all income-earning individuals and their withholding agents.

Under the circular, all tax authorities in the People's Republic of China (PRC) are required to implement the following administrative measures and management areas:

1) Set up a file-management system

An individual file should be set up for every taxpayer, including employees, non-employees, shareholders, investors, self-employed businessmen, expatriates, etc. A file related to an expatriate (whether or not an employee) should include his Residence Permit number (or Entry Permit number), Work Permit number, occupation, positions in home and host countries, tenure, date of arrival in the PRC, tax information of the PRC employer, whether the taxpayer is a key taxpayer, etc.

2) Set up a detailed tax withholding system

The tax authorities are requested to build files for each IIT withholding agent. The file should contain details of all income taxable or exempt; the number of taxpayers; amounts of tax paid, due, or refundable; surcharges and penalties; tax payment certificate numbers; and other information relevant to the withholding agent.

3) System of dual reporting by self-filing and withholding

A taxpayer and the withholding agent should report income to the relevant tax authorities and the authorities should examine the information reported from both sources.

4) Establish information sharing systems

The tax authorities should share and exchange information with various community organizations, including the police, courts, industry and commerce administrations, banks, cultural and sports centres, finance bureaus, labour bureaus, real estate bureaus, transportation bureaus, audit bureaus and foreign exchange bureau.

5) Enhance management of tax revenue sources

The tax authorities should focus the tax collection process with respect to income from the following key industries: finance, insurance, securities, power supply, telecommunications, petroleum, petrifaction, tobacco, civil aviation, railways, real estate, schools, hospitals, water and gas supply, publishers, highway management, foreign investment enterprises and foreign enterprises, high-tech enterprises, agencies and sports clubs. The authorities also should target and focus on reviewing information submitted by withholding agents that reported no income for three years or more ("nil filing withholding agents").

6) Strengthen the tax management of high-income earners

Taxpayers in key industries, domestic investors, individuals in the entertainment industry, sports stars, models and other high-income individuals are another target of the tax authorities. The authorities are asked to monitor the circumstances of such taxpayers and to expand the population of key taxpayers to achieve full income reporting.

7) Set up of information system

In addition, to accelerate the creation of IIT information and administration systems, the SAT will take the lead in developing IT solutions to track tax withholding records and improve information management.

Responsible persons in different enterprises, especially those in key industries and nil filing withholding agents, should examine their internal filing, human resources and compensation management system, so as to adhere to the full income reporting measures. It is important to review their tax reporting positions to determine whether their current approach is in compliance with the regulations and to have an early understanding and clarification of the relevant procedures, records and other requirements.

Constant Tse is Tax Partner and Elizabeth Zhou, Tax Manager, of Deloitte Touche Tohmatsu.

(HK Edition 09/28/2005 page4)