Cross-border tax planning with its complexity, covertness and efficiency has always been the place of preference for high-income people, and the tax avoidance problem it triggers has always been the focus of attention of competent tax authorities in various countries. In China, with the promulgation of the new Individual Tax Law and the implementation of the CRS system and the BEPS Convention, the cross-border tax avoidance problem is being gradually solved, and the former tax planning may trigger the anti-avoidance adjustment of tax authorities.
This article focuses on the three more common planning methods of high-income people, namely, indirect equity transfer, retaining profits overseas without distributing them, and changing the status of residents. Combined with the current domestic regulatory background of anti-avoidance of taxes for high-income people, it reveals the tax risks of the relevant people through the cases that have been disclosed so far. If you take history as a mirror, you can know the rise and fall; if you take people as a mirror, you can understand the gains and losses.

I. Regulatory background of offshore anti-avoidance for high-income people

(I) China's anti-avoidance laws and regulations have been gradually improved.

Searching on China Knowledge Network with the keywords of "anti-avoidance", "tax avoidance" and "tax avoidance", it can be found that the number of articles since 2005 has exceeded 500, of which the number of articles from 2018 to 2021 exceeds 800. It can be found that the number of articles since 2005 exceeds 500, of which the number of articles from 2018 to 2021 exceeds 800. The increase of social heat of this topic is closely related to the introduction of relevant regulations in China. In 2005, the State Administration of Taxation issued the Circular on Anti-Avoidance Work in 2005, which stipulates that the transfer pricing audit case approval system and other enhanced anti-avoidance work content, since then, China's anti-avoidance management work has been gradually standardized; in 2008, the formal implementation of the "Enterprise Income Tax Law" with a chapter on "Special Taxation" and a chapter on "Special Taxation". In 2008, the Enterprise Income Tax Law was formally implemented with a chapter on "Special Tax Adjustment"; in 2018, the newly revised Individual Income Tax Law substantially revised the anti-avoidance provisions and added a new general anti-avoidance provision in Article 8.

In addition to this, the Measures for the Implementation of Special Tax Adjustments (for Trial Implementation) issued by the State Administration of Taxation ("SAT") in 2009 systematically regulate transfer pricing, and the Measures for the Administration of General Anti-Avoidance Tax (for Trial Implementation), which was formally implemented on February 1, 2015, has perfected China's general anti-avoidance tax legislative vacancies.The Measures for Administration of Adjustment of Special Taxation Investigations and Mutual Negotiation Procedures, which was issued on March 17, 2017 ( State Administration of Taxation Announcement No. 6 of 2017, hereinafter referred to as "Announcement No. 6"), which is a positive outcome of China's initiative to absorb the BEPS Action Plan, provides detailed provisions on transfer pricing anti-avoidance adjustments.

The introduction of the above provisions makes it possible to improve the once international tax avoidance legislation gap, and also marks the initial convergence of domestic anti-avoidance rules with international laws and regulations, and the drastic increase in the risk of high-income people using extraterritorial financial means to avoid taxes.

(II) The implementation of the BEPS Convention and the CRS Agreement makes international tax avoidance invisible.

Differences in tax information between countries and tax enterprises are one of the main reasons for the prevalence of international tax avoidance, and most countries in the world, including China, are making efforts to eliminate such differences.

China signed the Multilateral Agreement between Competent Authorities for the Automatic Exchange of Tax-Related Information on Financial Accounts (hereinafter referred to as the "Agreement") on December 16, 2015, which is based on the Model Agreement between Competent Authorities in the Standard for the Automatic Exchange of Tax-Related Information on Financial Accounts (AEIFA) issued by the OECD in 2014 and approved by the G20 Brisbane Summit in the same year, and achieves the goal of enabling more than 100 countries to exchange tax-related information. The model inter-agreement was created to enable the exchange of financial account information between more than 100 countries, and in September 2018 the CRS (Common Reporting Standard) system was officially launched in China;

On June 7, 2017, China and 66 countries or regions around the world, including Germany, Britain, France, India, Russia and other countries or regions, signed the Multilateral Convention on the Implementation of Measures Relating to Tax Treaties to Prevent Base Erosion and Profit Shifting ("Convention"), which aims to revise existing bilateral tax agreements in one package and implement the results of the BEPS action plan. The Convention will enter into force for China on September 1, 2022, and will apply to the tax agreements signed between China and 47 countries (regions). The provisions of the "main purpose test", "corporate tax residency" and "amendment of the preamble of the agreement" will have a greater impact on China's tax agreements, and the "tax avoidance by agreement" will have a greater impact on China's tax agreements. The difficulty of international tax avoidance means of "selective tax avoidance" has risen sharply.

(III) Domestic regulation of high-income people will be tightened

In the article "An Overview: What Tax-Related Risks for High Net Worth Individuals Due to Tightened Regulation of Taxation" published by Huatax, it is systematically explained that China's taxation system for high-income people has been tightened. In the article, China Tax has systematically elaborated on the regulations issued by China on the tax supervision of high-income people and the accompanying tax-related risks of high-income people. In recent years, the proportion of individual income tax in China has increased, and the relevant authorities have repeatedly issued instruments to strengthen the supervision of high-income people and issued several normative documents to address the tax planning means often used by high-income people, such as the Announcement of the Ministry of Finance and the State Administration of Taxation on the Administration of the Collection of Individual Income Taxes on Income from Equity Investments and Businesses (Announcement No. 41 of 2021 of the Ministry of Finance and the State Administration of Taxation), which was published in the Ministry of Finance and the State Administration of Taxation. No. 41 of 2021), which restricts high-income earners from utilizing individual households for approval and increases the difficulty and risk of tax planning, and therefore many famous consulting firms at home and abroad have included the risk of tax regulation of high-income earners in China in their tax guides as a warning.

The rising number of high-income group audit cases disclosed in recent years shows China's attitude of strict control over international tax avoidance by high-income groups. Meanwhile, since the Announcement of the State Administration of Taxation on the Publication of the Measures for the Administration of Tax Credits (Trial) in July 2014 (Announcement of the State Administration of Taxation No. 40 of 2014), China has issued a number of regulations in order to improve the tax credit system, such as The Notice on Strengthening the Construction of Tax Credit for Individual Income Tax issued by the General Office of the National Development and Reform Commission and the General Office of the State Administration of Taxation in 2019, which will include natural persons with serious breaches of trust in their individual income tax declarations in the list of breaches of trust and implement a joint disciplinary mechanism, which will affect various aspects of a natural person's tenure, consumption and investment, and will have a particularly significant impact on the high-income group.

II. A Case to Show Risk: Typical Cases of Anti-Tax Avoidance for High-Income Individuals

(I) Non-resident Individual's Indirect Equity Transfer Adjusted by IRD, Paying Over 12 Million in Back Taxes

A and B are Chinese residents, C is a foreign Chinese, Company A is registered in British Virgin Islands (hereinafter referred to as "BVI"), Company B is registered in Cayman Islands (hereinafter referred to as "Cayman"), Company C is also registered in Cayman, and Company D is an enterprise in China. In October 2014, Company A and Company B need to handle the individual income tax payment business due to the transfer of equity interest in overseas enterprises. The business needs to go through the procedure of pending release and deposit, and the tax authorities need the taxpayer to provide the equity transfer contract according to the regulations. In the process, the tax officials found problems in the contract: A, B, C and Company A hold 10%, 2%, 58% and 30% of the shares of Company B. The four parties agreed to transfer the equity interests of Company B to Company C for about RMB 410 million, but almost all of the contents of the contract are in the agreement on an office building in the territory. Upon inspection, it was found that the office building was held by Company D, which was a wholly-owned subsidiary of Company B. Company B had only one subsidiary, Company D, and the office building was its core asset. Therefore, the tax authorities determined that Company C and Company A were indirectly transferring Chinese taxable property, and achieved the purpose of tax avoidance through indirect stock transfer, requiring Company C to pay more than RMB 46 million in back tax and Company A to pay more than RMB 12 million in back tax.

The anti-avoidance risk of indirect equity transfer is one of the international tax-related risk elements for high-income people. Equity transfer involves the status of tax resident, the form of enterprise organization, the tax system of each country, international tax agreements and many other issues, and its forms are very diverse, and this case is the most basic form of indirectly transferring the equity of a domestic enterprise by using a shell company outside China, which is also the most common form. China's tax system has three layers of "firewalls" for indirect equity transfers. The first layer is the domestic law system formed by laws and regulations, i.e., it is also the source of the taxing right of transferring China's taxable property, which is composed of the Law on Administration of Taxation and Collection of Taxes and its Implementing Rules and the Law of the People's Republic of China on Individual Income Tax and its Implementing Regulations; the second layer is the system formed by relevant tax treaties and BEPS agreements. international tax norms consisting of relevant tax treaties and the BEPS Convention, which, as mentioned above, provide the legal basis for resolving cross-border share transfer tax avoidance issues; and the third layer is the system of domestic normative documents consisting of the Announcement of the Ministry of Finance and the State Administration of Taxation on the Individual Income Tax Policies Relating to Income from Overseas Countries (Announcement of the Ministry of Finance and the State Administration of Taxation No. 3 of 2020), etc. The above provisions have refined The above provisions have refined the judgmental issues such as tax residency status and provided a grip for the practical implementation of the anti-avoidance adjustment for indirect equity transfers. The anti-avoidance system of indirect equity transfer composed of these documents has effectively curbed this form of planning and increased the tax risk of equity transfer for high-income people.

(II) Dividends are retained in offshore accounts for a long period of time without being distributed, and the tax demanded nearly one million dollars in back taxes

A is a resident of China, Company D is registered in BVI and is wholly owned by A. Company C is registered in Cayman and Company D holds 24.59% of the equity of Company C. Company B is registered in Hong Kong and is a wholly owned subsidiary of Company C. Company H is registered in China and is 100% owned by Company B. Company C was listed on the Hong Kong Stock Exchange in 2013, and it is stated in the listing announcement that the business activities are carried out by Company H. The tax authorities investigated and found that in 2011, the dividends were kept in offshore accounts for a long time without being distributed.

The tax authorities investigated and found that in 2011, Company H made a dividend of RMB 22 million, but Company A did not declare tax on the dividend in the PRC. In the course of meeting with Company A, Company A explained that the dividend from Company H was remitted to Company C, which was then distributed to Company D. Company D did not make any further dividend distribution to Company A, and Company A refused to provide information on the transactions of Company D. Company A was worried about the anti-avoidance action initiated by Company C, which was 100% owned by Company B. Company C was listed in 2013. A was worried that the tax authorities would launch an anti-avoidance investigation, which would have an impact on the listed company and its own credibility, and took the initiative to pay nearly 1 million RMB in back taxes on the dividend portion of the dividend.

This case is a typical tax case issued by Jiangsu Province in 2016, in which the shareholders retained their domestic income overseas by setting up companies in offshore tax havens and other forms to avoid the tax obligation of declaring and paying individual income tax to the Chinese tax authorities in respect of the global income due to the status of Chinese residents. In this international tax avoidance issue, previously, due to the unsound information exchange mechanism between tax countries, the international tax information gap is large, it is difficult to effectively avoid, so the use of overseas enterprises for a long time without distributing profits for tax avoidance is more prevalent, but with the implementation of the new tax law, the international anti-avoidance of tax experience and the exchange of tax information to make up for the "vacuum" in this area. However, with the implementation of the new tax law, rich experience in international anti-tax avoidance and exchange of tax intelligence, the "vacuum" in this area has been filled. According to the public information search, in recent years, a number of listed companies have attracted the attention of the tax authorities due to the long-term non-distribution of profits, and some of them have been subjected to tax audit, resulting in the fluctuation of the market value of the company.

In addition, the case involves Cayman and BVI as the preferred tax havens for "going out" enterprises and shareholders, but also due to the enactment of the local Economic Substance Law and the implementation of international tax regulations, the risk of tax avoidance by high-income people has increased, and the advancement of tax transparency will be more difficult for the taxpayers who have adopted the long-term undistributed profits in order to avoid taxes. The advancement of tax transparency will be more difficult for taxpayers who use long-term non-distribution of profits to avoid tax.

(III) Avoiding personal tax by taking the company's operating income and using children's foreign status to transfer income, which was adjusted by the tax bureau by more than 35 million dollars

Company A is registered in China, A is the actual controller of Company A, B and C are foreign Chinese, B is the child of A, and C is the spouse of B. In 2012, the tax bureau of country Z requested the State Administration of Taxation (SAT) for assistance through the representative office of China in the International Anti-Tax Avoidance Center (IATAC), hoping that we could provide information on the income and tax payment of Chinese couple B and C. After investigation, the tax bureau of a city in China started to investigate the matter and requested for assistance from the SAT.

The tax bureau of a city in China conducted an investigation and found that B and C had purchased five luxury properties and six expensive cars in State Z, as well as three properties and two pieces of land in the city of Zhongshan, and that the bank accounts of B and C had records of large amounts of remittances from A and other relatives, with a high frequency of such remittances and huge amounts of money, but neither of them declared their income from within the country. Through the linkage with financial institutions, the Tax Bureau utilized the water information of nearly 20 banks in the city to investigate the suspicious enterprises and individuals, and went through and verified tens of thousands of bank account transaction records, more than 2,300 entry and exit records, the industrial and commercial registration and change information of 10 enterprises spanning over 9 years, and the property rights registration materials of 9 real estates. It was confirmed that: A, in the name of borrowing money, acquired the operating income of Company A and other actual holding enterprises for a long time and transferred it to Country Z through the foreign accounts of several family members to avoid tax, and eventually the tax authorities required A to pay nearly 35 million RMB in back taxes.

This case is a case of using children's foreign status to transfer income to avoid tax, the use of foreign status to avoid tax in various forms, and due to the tax jurisdiction involved, the tax authorities to carry out investigations is particularly difficult, but with the improvement of the tax information exchange mechanism and international tax agreements, the problem has been effectively resolved, as of the time of this paper, China and the world's 107 countries have signed a double taxation agreement. At the same time, China's tax authorities can effectively monitor suspicious transactions by utilizing the gradually improved tax big data system, and carry out anti-avoidance investigations through international exchange of intelligence and data analysis, so that it will be more difficult to realize the path of tax avoidance by utilizing foreign status.

III. Other Focus Issues of International Tax Avoidance by High Income Groups

The above three cases mainly focus on the key areas of international tax avoidance for high-income earners. In addition, the change of resident status and offshore trust tax issues are also the hotspots of anti-avoidance for high-income earners.

(I) Domicile Tax

As early as ten years ago, some scholars discussed the issue of the naturalization tax, and it was mentioned again in the current two sessions of the National People's Congress. Due to China's current policy of strict control over high-income people, high-income people use the change of nationality to avoid tax, which may lead to a large amount of loss of national tax, and the issue is more urgent to solve the problem. At present, there are more than twenty countries explicitly provide for the withdrawal tax system, many countries in the preparation of regulations, the current provisions of the withdrawal tax system, including direct taxation and indirect taxation, direct taxation refers to the direct immigrant immigrants asset gains or property transfers of one-time tax; indirect taxation, including the tax on the country's tax residents in the future after the withdrawal of the tax in the next few years and to recover the tax concessions and other ways. Due to the large base of immigrants in China, the inevitable loss of talent and erosion of national tax revenue will have an impact on our economic development, wealth accumulation and social progress, so the issue of naturalization tax may become a problem for high-income people to consider.

(II) Offshore Trust

According to the information disclosed when our head enterprises were listed and news reports, the offshore trust funds involved in our country in 2018 alone amounted to nearly RMB 200 billion, and offshore trusts have been sought after by high-income people because of their asset segregation function, high confidentiality, property inheritance, and easy tax avoidance, and it is very common to adopt offshore trusts to avoid taxes in countries with high inheritance taxes. The incident of Ms. Zhang's offshore trust penetration that broke out some time ago has once again pushed the safety of offshore trusts to the hot spot. Under the CRS environment, the traditional way of avoiding taxes by offshore trusts using the country's insufficient information about offshore financial institutions is no longer feasible, and the national tax authorities can effectively break down the tax information barriers between various regions through the joint filing of declarations. Hwuason lawyers have published an article titled "Offshore Trust Tax Compliance under International Tax Transparency" in China Foreign Exchange, which systematically elaborates how to do a good job in offshore trust tax compliance. For high-income people, the tax avoidance function of offshore trusts has been greatly reduced, which may even lead to tax risks. However, with the continuous improvement of the relevant system, the security of offshore trusts will be enhanced, and the function of asset segregation and other functions will be more obvious, so the high-income people should do a good job of checking the tax risks of offshore trusts in order to avoid their own tax risks.

IV. Summary

This paper reveals the tax audit focuses of indirect equity transfer and change of resident status of non-resident individuals through cases and hot issues, and systematically elaborates the tax risks related to individual income tax of high-income people, but the forms of cross-border tax planning are complicated and diversified, which is difficult to exhaust due to the limitation of the length of the article.

Against the background of tax reform, personal income tax has been rising in China's tax revenue in recent years, and the tax authorities have been deepening international tax cooperation and improving the joint declaration system to combat cross-border tax avoidance and prevent national tax loss, which has led to a variety of cross-border tax planning, and the tax risk of high-income people has risen significantly. Therefore, high-income earners should pay attention to tax compliance, conduct regular tax health checks, and actively communicate with tax authorities and tax lawyers to isolate risks at source. If they are involved in risky matters, they should seek relief as early as possible to avoid further deterioration of the situation.