As tax authorities continue to strengthen the supervision of personal tax, the tax-related risk of natural persons is also getting higher. At the same time, the two high judicial interpretations will be the past double high people through the signing of “yin and yang contract” and other forms of hiding or dismantling the income of tax evasion of the usual tricks clearly included in one of the tax evasion behavior, for the judicial organs to combat the double high people to evade taxes to provide a clear and operable guidelines, resulting in a higher criminal risk. Based on this, this paper intends to analyze the causes of the severe tax risk of double-high individuals from the common forms of tax risk of double-high individuals in practice as a starting point and reveal the changes of the tax risk of double-high individuals after the introduction of the two high judicial interpretations, with a view to providing the double-high individuals with strategies to cope with the situation.

I. Trend Observation: Recent Outbreak of Multiple Individual Income Tax Audit Cases

(i) Introduced case: sole proprietor enterprises were investigated for white slips in accounts

Recently, a huge individual tax adjustment case has attracted attention. It was reported that the natural person involved in the case registered and set up a sole proprietorship enterprise, and in the course of carrying out its business, it did not obtain VAT invoices for the purchase of data, services, etc. due to the lack of proper tax compliance and financial compliance. At the time of the annual remittance of operating income, self-made vouchers, such as contracts, payment records and collection vouchers, were recorded as cost deduction. The sole proprietorship has been operating under the above model for more than ten years, and has been operating well with a huge water flow, with revenues exceeding RMB 100 million for the past five years of business alone.

The sole proprietorship was subject to a tax audit because the tax risk was detected by the tax big data, and the risk information was pushed from the General Administration of Taxation to the competent tax authorities. Currently, the sole proprietor is facing the risk of recovering the personal income tax and late payment fees for the past five years, or the risk of being characterized as tax evasion with no time limit for recovering the personal income tax and facing the criminal risk.

(ii) Notification of cases: State Administration of Taxation notified a number of individual tax cases

According to the official website of the State Administration of Taxation (SAT), a number of individual tax cases have occurred recently:

The First Inspection Bureau of Hohhot Municipal Taxation Bureau of Inner Mongolia Autonomous Region investigated and handled a case of failing to handle individual income tax consolidated income remittance in accordance with the law. Taxpayer Cai Moumou was found to have been penalized for tax evasion by underpaying his personal income tax by falsely filling in special additional deductions for medical treatment of major illnesses and support for the elderly when he handled the consolidated income tax remittance for the years 2019, 2020 and 2021.

The Inspection Bureau of Tianshui City Taxation Bureau in Gansu Province investigated and dealt with the case of tax evasion by Yang Moumou, a network anchor. Yang Moumou earned income from webcasting between 2020 and 2021, and underpaid individual income tax of RMB 313,800 yuan and other taxes of RMB 40,100 yuan by means of not filing tax returns and false declarations, and was found guilty of tax evasion and punished.

The Tax Bureau of Chengdu Municipality, Sichuan Province, joined hands with the court to enforce a case of failure to comply with the law in making compensatory tax payments for comprehensive personal income tax reimbursement. The taxpayer, Yao Moumou, failed to handle the consolidated individual income tax remittance for the year 2021 within the legal deadline and underpaid the individual income tax. The First Inspection Bureau of Chengdu Municipal Taxation Bureau served the Decision on Tax Processing and Decision on Tax Administrative Penalty to the taxpayer in accordance with the law, and Yao Moumou still refused to pay the tax with various excuses. The tax department then transferred the case to the Executive Board of Chengdu Jinjiang District People's Court for enforcement, froze all of Yao's bank accounts, WeChat and Alipay accounts and other fund accounts, and issued a restriction on consumption order. After a joint interview by the tax department and the court, under the deterrence of the law, Yao has now paid all taxes, late fees, fines and additional fines.

(iii) Risk Observation: Coexistence of Administrative Liability and Criminal Risks

Although China's personal income tax is one of the first few taxes to be legislated, for a long time in the past, China's economic development was relatively backward, and a large number of natural persons' incomes did not reach the starting standard, and therefore did not need to pay personal income tax. In the practice of tax collection and management, due to the limitations of the management efficiency of the tax authorities, most of them adopt the “catching the big and letting go of the small” approach to collection and management, and are not strict in the supervision of personal income tax, which leads to the weak tax awareness of natural persons and poor compliance with the tax law in China. Since the implementation of the 2018 Individual Income Tax Law on remittance, tax authorities around the world have significantly strengthened the supervision of individual tax, and the phenomenon of natural persons being subject to tax audits and being penalized has increased.

The risk is not limited to administrative liability. It is not difficult to see from the above cases that the criminal risk of the natural persons involved is also high. If a natural person registers a sole proprietorship enterprise and applies for tax registration, his or her non-declaration behavior is tax evasion; if the natural person does not fulfill the treatment and punishment, the tax authorities may transfer the case to the public security for treatment upon issuance of a recovery notice. In the case of Chengdu, the tax authorities joined with the court to carry out enforcement, instead of issuing a separate recovery notice, which can be said to be a “one-side-of-the-net” initiative, demonstrating humane law enforcement.

II. What are the common forms of tax risk for double-high individuals?

(i) Signing of yin-yang contracts

In the past, the double-high people often signed the contract of yin and yang, the equity, real estate and other assets for the nominal “low price” transfer, in order to avoid the corresponding tax. This is usually done by agreeing on a very low transaction amount in the nominal contract (i.e., the “yang contract”), which is used for filing or tax declaration. However, in reality, the parties enter into a separate contract for the actual fulfillment of the contract (i.e., the “yin contract”), in which the agreed transaction amount is very high. In addition to the transfer of equity and real estate, such illegal behavior also exists in the transaction of goods or services with high consideration, such as film and entertainment.

(ii) Splitting income and converting the nature of income

In order to reduce the burden of personal income tax, some high-income earners often resort to such means as splitting their salary income or labor income, and converting part of their salary income or labor income to other forms of income, so as to reduce the amount of tax payable. For example, reimbursements based on employees' reimbursements occurring in the course of performing corporate work are not included in taxable income because they are not considered income. Therefore, some enterprises will authorize their employees to “look for tickets” and turn their salaries into reimbursements in order to avoid personal income tax.

Another example is that, as China's personal income tax rate is progressive, the higher the taxable income, the higher the applicable graded tax rate. As a result, there are also some corporate executives who utilize false employee information and accounts to split their one paycheck into multiple paychecks in order to apply a lower tax rate.

Further, since the tax rate of comprehensive income in China is different from that of business income, and the tax rate of business income is lower and cost deduction is available, there exist some high-income people who convert the income obtained from labor and work into business income by registering and setting up an individual business or a sole proprietorship enterprise, and reduce the tax burden by falsely inflating the Chenben or by violating the application of the tax approval policy.

(iii) White entry and false invoicing

This type of situation can be mainly divided into two categories, both of which occur in practice. One category is: natural person registers to set up individual business or sole proprietorship enterprise, and then remits all the income and cost, at this time, there may be through the white entry or even false invoicing behavior, increase their own cost to reduce tax.

Another category is: enterprises in the business process for the executive “tax planning”, through the labor dispatch unit or flexible labor platform, the executive's wages and salaries into labor compensation, and even for temporary tax registration, recognized as business income. The enterprise then obtains the invoice issued by the labor dispatch unit or flexible labor platform. At this time, the invoices are easy to be characterized as false invoicing because they do not actually correspond to the labor dispatch or flexible labor business.

(iv) Unauthorized Application of Tax Approval Policy

Previously, the tax authorities have investigated and dealt with a series of “planning” behaviors using the local tax depression policy. These acts do not always constitute tax evasion, and in practice, according to the different caliber of the tax authorities, there are differences. For example, an investment partnership made use of the local tax approval policy to apply for individual income tax approval for its partners, and was later inspected by the local tax inspection department, which considered that the enterprise did not meet the criteria for tax approval, but because the policy was authorized by the competent tax department, it was “due to the responsibility of the tax authorities”, and only the principal amount of tax was recovered. Another example is that a high-income person, in order to enjoy the tax approval policy for individual business households, used the identity information of his relatives to register several individual households, split his income and then applied the approved policy separately, which was recognized by the tax authorities as a false declaration and constituted tax evasion.

III. Why is the tax risk of double-high individuals increased?

(i) The ITS Module is on-line, and the means of personal tax supervision has been strengthened.

The ITS module, i.e. “Summary Inventory of Business Income of Natural Persons”, is a recently added module in the e-Tax Bureau for Natural Persons, which is specifically designed for the supervision of business income entrusted to and issued on behalf of natural persons. It has been reported that a large number of flexible workers have received SMS notifications from the Tax Bureau requesting them to provide explanations on the business situation of the income received through the flexible labor platform, indicating that the supervision of individual income tax has been further strengthened.

(ii) Accurate monitoring of individual tax risks by tax big data

With the gradual advancement of the tax supervision reform of “tax by numbers”, tax big data is playing an increasingly important role in the tax governance process. Specifically, for individual households, sole proprietorships, companies and other types of subjects that have been registered for tax purposes and are subject to tax supervision, their incomes and costs are monitored by corresponding data indicators. If there is a situation where an enterprise does not have input invoices and the tax burden rate does not match its income, it may trigger a tax risk warning.

Similarly, tax authorities in some regions have established cooperative relationships with judicial authorities, so that if a civil dispute arises between natural persons due to contractual disputes, and the judicial authorities determine that there are tax-related violations such as “yin and yang contracts”, the relevant clues will be synchronized and pushed to the tax authorities to deal with.

(iii) After the interpretation of the two high schools, tax evasion will be more precise.

For double-high individuals, they mainly face the risk of administrative penalties for tax evasion and criminal penalties for tax evasion. Phenomena such as “yin and yang contracts”, “splitting income”, “filling in special deductions” and “not declaring taxes” are very common. common. The Interpretation of the Supreme People's Court and the Supreme People's Procuratorate on Several Issues Concerning the Application of Law in Handling Criminal Cases of Endangering Tax Collection and Administration (Legal Interpretation [2024] No. 4, hereinafter referred to as the Two Higher Interpretations) was issued, and a series of tax evasion means have been accurately cracked down, which involved a large number of natural persons' personal tax issues, and, specifically, mainly embodied in the following four aspects:

First, it explicitly combats the behavior of “yin and yang contract”;

Second, for the first time, the behavior of “decomposing income in the name of others” is included;

Third, the behavior of “false declaration of special additional deduction” is added;

Fourth, the connotation of “non-declaration” is expanded.

The above tax evasion behaviors are explicitly included in the scope of the fight, and many of them are “tailor-made” provisions for the regulation of personal tax of double-high-income individuals, aiming at combating personal tax evasion behaviors.

(iv) Self-employed persons and sole proprietorship enterprises should prevent non-declaration behavior

It is especially important to emphasize the expansion of the connotation of “non-declaration”. The interpretation of the two high courts stipulates that “one of the following circumstances shall be recognized as ‘non-declaration’ as stipulated in the first paragraph of Article 201 of the Criminal Law:

a taxpayer who is registered in the registration authority according to the law for the establishment of a taxpayer, and does not declare tax when a taxable act occurs;”emphasizing that As long as the tax registration, the occurrence of taxable behavior without tax declaration, constitutes tax evasion.

Since natural persons cannot be registered for tax purposes, they need to be notified by the tax authorities once in order to constitute a “non-declaration”. However, unlike natural persons, individual industrial and commercial households and sole proprietorship enterprises can register for tax purposes, so that failure to file a tax return even after tax registration constitutes tax evasion and increases the risk of tax evasion.

IV. How to prevent the tax risk of double-high people?

First of all, double-high people should enhance the awareness of tax risk and understand the tax laws and regulations. Taxation is an important means of national macro-control, and the tax law is authoritative and serious. Double-high people should study the tax law seriously, understand the tax preferential policies, and make clear their tax obligations and rights. They should also pay attention to the changes of the tax law and adjust the tax strategy in time to avoid the tax risk caused by not understanding the tax law. In addition, they should strengthen the communication with tax authorities to keep abreast of tax policy dynamics and law enforcement, and improve the transparency and standardization of tax work.

Secondly, double-high individuals should adhere to the authenticity of their business, standardize their tax behaviors, strengthen the awareness of tax compliance, and ensure the truthfulness, accuracy and completeness of tax information. In particular, they should not resort to false declarations to evade tax, which will lead to their exposure to administrative and criminal risks.

Thirdly, double-high individuals should reasonably utilize tax incentives to reduce tax risks. In order to reduce the tax burden, double-high individuals can fully understand and reasonably utilize these tax incentives, but it should be emphasized that while enjoying the tax incentives, they should also pay attention to comply with the provisions of the tax law, so as to avoid the tax risks arising from the abuse of preferential policies.

Lastly, in the event of a tax audit, dual-high-income individuals should raise their awareness of risk response. If necessary, they can consider hiring professionals to carry out benign communication with tax authorities from the perspective of tax law, so as to properly resolve tax risks at the front end and prevent criminal risks of tax evasion and false billing.