In recent years, the regulation of personal income tax has continued to generate heated discussions, and has gradually developed into a troika of VAT, corporate tax and personal tax. Among them, the personal income tax of high net worth individuals has become a key concern of the state. HNWIs are under heavy tax pressure and have sufficient resources to assist them in tax planning, but in a time of tightening regulations, such "planning" may lead to huge tax risks. The purpose of this article is to shed light on the tax risks that HNWIs may be exposed to, for the benefit of the readers.

I. Overview of Tax-Related Issues for High Net Worth Individuals

In view of the different criteria for the identification of HNWIs in various statistical reports, this article refers to the criteria used in the China Private Wealth Report 2021 published by China Merchants Bank, which refers to individuals with investable assets of more than RMB 10 million, and according to statistics, the number of HNWIs in China has already reached more than 3 million people.

HNWIs are mainly private entrepreneurs; executives of central enterprises, state-owned enterprises and large-scale private enterprises; technical personnel; film and television personnel; net celebrities and head of self-publishing media; sports industry practitioners; high-paying industries, such as finance; professional managers; and people who hold a large amount of money due to family connections. In terms of industry distribution, in addition to the more traditional real estate, construction and finance industries, and the energy industry, the number of HNWIs in the Internet, technology industry, entertainment and sports industry, medical industry, and manufacturing industry has continued to climb in recent years.

HNWIs are generally characterized by the following two aspects: firstly, they hold a large amount of investable assets, which are commonly used for personal investment, and they have more sources of income, including but not limited to equity transfers, real estate transfers, salaries and wages, income from production and business operations, etc., which involves the payment of multiple taxes such as value-added tax (VAT), personal tax, consumption tax, etc.; secondly, HNWIs generally have a higher salary and other incomes, and are required to bear a larger amount of personal income tax. Secondly, HNWIs' salaries and other incomes are generally higher and they need to bear a larger amount of personal income tax, while the distribution of HNWIs' wealth and sources of income are characterized by cross-region and internationalization.

Because of these two characteristics, HNWIs face a heavier tax burden, which not only refers to the tax burden borne by individuals, but also refers to the burden of tax compliance costs. From an individual's point of view, it is human instinct and nature to avoid harm and calculate the bitterness and happiness, and the "paper" gain of tax planning is much higher than the loss; at the same time, due to the cross-regional and cross-border characteristics of HNWIs' income and distribution, it is not convenient for tax authorities to obtain their tax information, which makes it more difficult for them to conduct audits, and it is difficult for them to effectively grasp their tax-related arrangements. However, in recent years, with the tightening of the overall national tax regulation and the intensification of the strict regulation of HNWIs, many tax planning that once seemed "legal and reasonable" have been subjected to audit by the tax authorities, and their tax risks have increased dramatically.

II. High Net Worth Individuals Become Subject to Strict State Regulation

(I) HNWIs become the focus of IRD's attention and special tax audits are conducted

According to the indicators of China's Gini coefficient published by the National Bureau of Statistics, China's Gini coefficient has remained above the warning line of 0.4 since 2000, and the State, in order to guard against the effects of the Matthew effect, has proposed to strengthen the regulation and supervision of high income and rationally regulate the distribution of national wealth. A number of normative documents have been issued to make it clear that the tax services and regulation of high-income and high-net-worth individuals should be strengthened in accordance with the law.

Since April 2021, the State Administration of Taxation's Inspection Bureau has included high-income people's equity transfers and other areas in the focus of inspections in its document "Precise Implementation of Tax Supervision Guided by Tax Risks", provinces and cities have responded by introducing corresponding reform programs. For example, Shanghai has clearly proposed in the Implementation Plan for Further Deepening Tax Administration Reform to strengthen risk prevention, control and supervision in key areas; to strengthen tax services and supervision for high-income and high-net-worth individuals in accordance with the law; to conceal income, misstate costs, transfer profits, and to utilize "tax depressions", "shady contracts" and related transactions, and so on. It will also strengthen the prevention, control, supervision and inspection of tax evasion behaviors such as concealing income, inflating costs, transferring profits, and using "tax depressions", "yin-yang contracts" and related transactions.

Also in August 2021, the person in charge of the Inspection Bureau of the State Administration of Taxation said that the tax inspection department was filing a case to check on individual people who concealed high income and failed to declare tax truthfully. In the following months, Shanghai, Hangzhou and other local tax bureaus have investigated and dealt with a number of cases of tax evasion by network anchor stars, and at the end of 2021, 31 provincial tax bureaus issued announcements urging celebrity netroots to make up for their taxes.

In early 2022 the State Internet Information Office, the State Administration of Taxation, the State Administration for Market Supervision and Administration issued the "Opinions on Further Regulating Profit-making Behavior of Webcasting and Promoting the Healthy Development of the Industry" (Taxation General Income Issue 〔2022〕 No. 25) explicitly targeting network practitioners to intensify the crackdown on tax-related criminal acts.

(II) Increased tax planning crackdown and increased risks

On December 30, 2021, the Ministry of Finance ("MOF") and the State Administration of Taxation ("SAT") issued the Announcement on the Administration of Collection of Individual Income Taxes on Income from Equity Investments ("MOF") and Business Operations ("SAT") (MOF SAT Announcement No. 41 of 2021, hereinafter referred to as "Announcement No. 41"), which clarifies that all equity investing individuals and limited partnerships are subject to the checking and collection of income tax. levy, i.e. abolishing the authorized levy for equity invested individuals and limited partnerships. The path for HNWIs to utilize the approved levy on equity investments to reduce their personal income tax is no longer feasible.

The following day, the Ministry of Finance and the State Administration of Taxation ("SAT") issued the "Rectification of Issues Concerning Illegal Refunds of Tax Revenues and Other Aspects," addressing the issue of the use of illegal tax refunds resulting in the loss of state taxes, and in particular, the following was raised: "With regard to the issue of 'loopholes in the approved levies on individual income tax, which are being utilized by some high-income earners for tax evasion' Question. The SAT verified the main ways in which the persons concerned evaded taxes, and through in-depth analysis, argumentation and assessment, studied and determined the ways of handling tax adjustments and recovering taxes. Tax authorities around the world have strengthened internal and external synergies and taken multiple measures to promote rectification." Based on this, the risk of HNWIs utilizing tax depressions to reduce their tax burden has increased.

(III) Rule by numbers: golden tax IV and CRS reduce tax information gap

Since November 2022, the Shenzhen Tax Bureau issued the "Announcement of Public Bidding for the Phase IV Construction Project of the Tax Application Platform for Natural Persons", the Golden Tax IV has continuously triggered heated discussions. With the gradual rollout of the Golden Tax IV, China will complete the transition from "controlling taxes by votes" to "controlling taxes by numbers". With the gradual spread of Golden Tax Phase IV, China will complete the transformation from "tax control by votes" to "tax control by numbers", and improve the tax collection and management capacity in all aspects through digital upgrading and intelligent transformation to achieve the purpose of classification and precise supervision. As the tax authorities continue to strengthen their data collection and analysis capabilities, the information gap between the tax authorities and taxpayers will be gradually eliminated, and it will be difficult for taxpayers to take advantage of the simple information asymmetry for tax planning.

In July 2014, the OECD, under the commission and approval of the G20, issued the standard for the automatic exchange of tax-related information on financial accounts, in which the unified reporting standard ("CRS") stipulates the requirements and procedures for financial institutions to collect and report information on the accounts of individuals and enterprises that are foreign tax residents. China issued the Administrative Measures for Due Diligence on Tax-Related Information on Non-Resident Financial Accounts in May 2017 with reference to the CRS, aiming to promote international tax cooperation to enhance the transparency of cross-border tax-related information, and to exchange information on individual and enterprise accounts with other countries. As of March 2023, China has signed agreements on the exchange of tax information with more than one hundred countries, including the Bahamas, the British Virgin Islands, and Bermuda. It is becoming less feasible for HNWIs to use tax havens to register offshore shell companies and use offshore financial products to avoid taxes.

III. Tax-related risks faced by high net worth individuals

(I) Criminal Risks

1. Criminal risk of false invoicing

False invoicing cases are common in the coal, petrochemical, renewable resources, logistics and other industries, and the middle and senior management of these traditional industries generally belong to high net worth individuals, and once an enterprise is involved in false invoicing crimes, the main personnel in charge of the enterprise will usually face criminal penalties and suffer from imprisonment. In addition to the above enterprises due to industry specificity may face the risk of false invoicing crime, the enterprise false invoicing to increase the operating costs to reduce the income of the behavior is also not uncommon. In recent years, China has repeatedly proposed to focus on cracking down on fraudulent invoicing type of crimes and establish regularized work deployment. Since the establishment of the regularized working mechanism for cracking down on fraudulent invoicing and tax cheating crimes in October 2021, the six departments have actively implemented the requirements of the "Guiding Opinions on Doing a Good Job in Regularizing the Fight Against False Invoicing and Fraudulent Taxation Laws and Crimes", and the six ministries and commissions convened the joint work exchange and promotion meeting for the crackdown on fraudulent invoicing and tax cheating in June 2022 In June 2022, six ministries and commissions held a joint meeting to promote the exchange of work on combating tax fraud and export tax fraud, putting forward the slogan of "tax fraud must be severely combated" and "illegal laws must be severely punished" for the crime of fraudulent invoicing. For high net worth individuals, it is especially critical to do a good job of corporate compliance and judicial relief in the case of fraudulent tax evasion.

2. Risks of tax evasion

On the other hand, as HNWIs are mostly heads of enterprises, there may be cases where they use their personal accounts to make corporate fund receipts and expenditures out of the consideration of convenience of business operation and reduction of corporate and personal tax burdens, triggering the mixing of corporate accounts with personal accounts. As the current Golden Tax Phase IV has already realized the establishment of data sharing and exchange between tax authorities and banks, insurance and other institutions, and the People's Bank of China has also carried out the pilot project of large-value cash management, the frequent fund transactions in private accounts are likely to attract investigations by the tax authorities, and the mixing of public and private accounts may be recognized as tax evasion, or even filed for tax evasion by the judicial authorities.

(II) Administrative Risks

1. Risks of Tax Depression and Fiscal Rebate Audit

In addition to the criminal risks mentioned above, in recent years, a number of cases of celebrity netroots tax planning being characterized as tax evasion and subject to administrative penalties by the tax authorities have continued to attract public attention, and have sounded an alarm to the majority of HNWIs.

Tax depressions and fiscal rebates is the most common means of tax planning, many high net worth individuals spend a lot of money to hire professional services designed program, the core of its territory is around some provinces or regions of the "low tax" and fiscal rebate policy to reduce the actual tax burden, such as Horgos, Hainan and so on. The State Administration of Taxation has issued a series of documents such as "Notice on the preferential policies on enterprise income tax in Hainan Free Trade Port" and "Rectification of irregularities in the return of tax revenues", which on the one hand stops non-compliant tax return regulations and on the other hand cracks down on tax avoidance behaviors. For example, in No. 242 of the Shenzhen Tax Investigation Department [2020], the Audit Bureau of Shenzhen Taxation Bureau determined that the enterprise used a company in Horgos to transfer its income and profits to undercount the enterprise income tax and approved the enterprise income tax at a rate of 30% of the taxable income rate, and demanded that the enterprise pay back the tax and late payment fees totaling nearly 100 million yuan.

2. Parity stock transfer risk

The secondary accumulation of wealth by HNWIs usually involves substantial investments and shareholdings. When exiting the investment, in order to minimize the tax, there exist individuals who first transfer the equity at par to a sole proprietorship or partnership under their name, and then trade with the equity transferee as a sole proprietorship. However, with the introduction of the Measures for Administration of Individual Income Tax on Income from Equity Transfer (for Trial Implementation) (SAT Announcement No. 67 of 2014) and Announcement No. 41, such behavior, once discovered by the tax authorities, is likely to be recognized as tax evasion and subjected to tax audits, and will face back taxes and late payment fees.

3. Risk of converting the nature of income

Partnerships and sole proprietorships may also be used to convert the nature of income. By setting up a sole proprietorship to collect personal income or transfer income from a fictitious business, HNWIs convert their personal labor income into the operating income of a sole proprietorship, and take advantage of the difference in the tax rates between labor income and operating income, and the approved levy of a sole proprietorship to reduce their tax burden. However, the act of making false declaration by converting the nature of income through fictitious business is very likely to attract the attention of the tax authorities and may be recognized as tax evasion and subject to high fines as a result.

(III) Risk of anti-avoidance adjustment

China has begun to pay attention to and emphasize the anti-avoidance issue for individuals, not only formally established the anti-avoidance rules in the new Individual Income Tax Law, but also successively launched the General Anti-Avoidance Law and the Implementation Measures for Special Tax Adjustment (for Trial Implementation), etc., and issued a number of announcements to improve the anti-avoidance system. The implementation of CRS will make it more difficult for HNWIs to avoid tax through low-tax jurisdictions abroad, and the transfer of overseas equity may be recognized by China's tax authorities as an indirect transfer of shares of a non-resident enterprise and subject to double taxation due to the existence of the "Controlled Foreign Company Rule".

Tax-related structures set up by HNWIs using overseas trust companies may also be subject to anti-avoidance adjustments by the tax authorities as the transactions violate the "reasonable business purpose"; "parity" transactions of related enterprises may also be subject to anti-avoidance adjustments as they do not comply with the "independent transaction principle"; and "parity" transactions of related enterprises may also be subject to double taxation as they do not comply with the "independent transaction principle". The implementation of the rule of "actual management organization" makes it very difficult for domestic and foreign affiliates to utilize related transactions to transfer income and reduce tax. In practice, the Shenzhen tax inspection department has used the following as the basis for the "actual management organization of a Hong Kong company". "In practice, the Shenzhen tax inspection department required the income of Hong Kong companies to pay enterprise income tax according to the mainland tax resident enterprises on the ground that the actual management organization of the Hong Kong companies was in mainland China, and the one-time payment of back tax, which caused a great blow to the operation of the enterprises.

IV. Summary

This article mainly focuses on the characteristics of HNWIs, and highlights the criminal, administrative and anti-avoidance tax risks that HNWIs may face in light of the adjustment of tax policies in recent years. With the improvement of tax regulations in recent years, the tax risk of HNWIs is increasing, so it is necessary to balance the tax burden and potential tax risk from the perspective of "tax-legal" combination, through the effective allocation of assets by prior layout and structural arrangement.