China: Tax audits on private wealth

The high net worth individuals (‘HNWI’) segment in China has drawn intensive public and regulator attention in recent years because of the eye-popping wealth growth and scale of tax evasion. 

In March 2022, the central government urged for intensified measures on tax administration on HNWIs, echoed by local tax authorities launching plans to reignite HNWIs-focused tax inspections, leading to a surge in tax audit cases on HNWIs. The following table illustrated some of the recent well-known cases.

How is the term HNWI defined?

There is no official and unanimous definition for HNWIs. Yet by the tax filing standard, individuals with an annual income over RMB 120,000 are already called the “high-income earners” and are required to file an annual return to the Chinese tax authorities, according to a tax circular, Guo Shui Fa [2010] No. 54. In practice, as observed in many tax audit cases, HNWIs are often affluent individuals with assets of RMB 10 million or more (ca. 1,3 million EUR).

How are targets selected?

In general, local Chinese tax authorities have now the mature technical means to organize big-data-based tax inspections targeting at HNWIs comprising also tax data from the official tax system (called the Golden Tax System). A typical system-based audit procedure would cover the following:

• Information sharing: The data would be collected from various regulatory regimes, including tax, employment and social security, judiciary, financial, licensing and immigration, etc.;
• Information verification: The data would be verified, consolidated, and classified in various ways according to taxpayers’ identity, cell phone number, or profession;
• Taxpayer portrait module: Taxpayers’ portrait and behavioral data would be analyzed comprehensively according to a tax risk index model covering over a thousand indexes;
• System-generated alerts: Taxpayers with abnormal or significant cash flow or turnover could be red-flagged by the system which may disseminate reminders for compliance checks. 

What is the tax audit status on HNWIs in China?

China is now home to 2.62 million HNWIs with investable assets of RMB 10 million or more in 2020, according to the 2021 China Private Wealth Report published by China Merchants Bank (CMB). 

HNWI segment tax audits are getting more frequent and organized. Two national decrees were issued by the central government for reinforcing tax administration on HNWIs, in March 2021 and July 2022. Places practicing preferential tax regimes also join the efforts to mandate periodic tax audits. For example, Hainan Province announced a two-week intensive tax check on HNWIs on 22 September 2022. 

More audit cases against aggressive tax planning are published by the authorities. In one recent case, as listed in the table above, an entertainment celebrity was fined heavy-handedly by the Beijing Tax Bureau on 25 November for tax evasion. The tax payer, Canadian by origin, earning billions from his acting and singing career in China, was charged for concealing his income between 2019 and 2020 and was finally charged RMB 300 million (equivalent to USD 85.7 million) for taxes, late payment fees, and fines. 

Experienced HNWIs are more open to equity and financial products, and professional asset allocation, posing significant challenges to the tax administration. This tax payer segment has its particular complexity, arrangements, and cross-border income structure. More governmental efforts could be foreseeable in legislative updates, inter-departmental collaboration, and international cooperation to curb aggressive tax planning.

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