Previously, Huatax has summarized the main risks of high-income people under the current tax-related regulation in the article "An Overview: What Tax-Related Risks for High-Income People Due to the Strict Regulation of Taxation? In the previous article, Huatax summarized the main risks of high-income people under the current tax-related regulation; and systematically elaborated the tax risks that high-income people may incur due to the transfer of equity through the article "Case Analysis: Five Types of Common Tax-Related Risks of Equity Transfer of High-Income People"; in this article, we will continue to explore the tax-related risks of high-income people, and reveal the risks behind the planning of their incomes through the analysis of cases for the benefit of the readers. 

Risk 1: Conversion of labor remuneration to business income through individual households and partnerships

In FY2019, Xu converted the nature of income by setting up an individual business household and converted his income from labor remuneration obtained from an internet platform to personal production and business income by making false declarations, resulting in an underpayment of individual income tax of RMB20 million.In FY2020, Xu failed to make tax declarations on his income from labor remuneration obtained from an internet platform, resulting in an underpayment of individual income tax of RMB18 million.

The Inspection Bureau of a municipal tax bureau discovered its illegal behavior during the inspection process, determined that it constituted tax evasion, and imposed a two-fold fine of 40 million yuan on its conversion of the nature of income to underpay individual income tax in FY2019; and a one-fold fine of 18 million yuan on its failure to file a declaration in FY2020.

In recent years, cases of conversion of income nature in the entertainment industry being audited by tax authorities have occurred from time to time, and as it is one of the industries with the highest degree of public exposure, the relevant cases are bound to cause extensive discussions among people from all walks of life. Conversion of income has been widely used in the past few years in tax planning for high-income earners, usually in conjunction with tax authorization, to significantly reduce the tax burden of individuals. However, 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 Announcement of SAT Announcement No. 41 of 2021, hereinafter referred to as the "Announcement No. 41"), which explicitly implements the check-and-collect levy on all equity investing individuals and limited partnerships, and abolishes the tax burden of equity investing individuals and limited partnerships. With the abolition of the approved levy for individual entrepreneurs and limited partnerships with equity investment, the path for high-income people to reduce their tax burden by adopting the approved levy has been blocked, and the corresponding planning behaviors of converting the nature of income have also been strictly investigated and dealt with.

As for this case, Xu received his labor remuneration in the name of individual entrepreneur and declared it as business income, which constitutes the conversion of income to avoid paying tax. The tax authorities imposed a fine of two times for Xu's tax evasion by conversion of income, and only a fine of one times for his failure to file a return. From the severity of the penalty, it can be seen that the tax authorities have taken a more severe attitude towards this type of tax evasion by conversion of income, and high-income earners should be aware of the high risk and high cost of adopting this tax plan.

Risk 2: Reducing tax burden by taking advantage of the ambiguous provisions on remuneration for labor services and business income

Shi Mou is the legal representative of an education consulting company, and Du Mou is a lecturer hired by the company to provide course training services. In April 2019, Du Mou applied to the tax authorities for a VAT invoice issued on behalf of Shi Mou after obtaining the remuneration for the course and declared the payment of individual income tax according to the heading of "income from business". During the inspection, the tax authorities found that the aforesaid training services should be declared under the item of "Remuneration for Labor Services", and according to Article 8 of the Announcement of the State Administration of Taxation on the Issuance of Administrative Measures for Withholding and Payment Declaration of Individual Income Tax (for Trial Implementation) (Announcement of the State Administration of Taxation No. 61 of 2018), the education company failed to withhold and pay the individual income tax on behalf of Shi Mou in accordance with the regulations. withholding and payment of individual income tax on behalf of the company, requiring the company to make up for the withholdable but not withheld individual income tax and imposing a 50% fine.

The focus of this case is whether the education and training expenses should be declared as "business income" or "remuneration for labor services". The "business income" stipulated in Article 6(4) of the current Regulations for the Implementation of the Individual Income Tax Law is more general, which is mixed with the "remuneration for labor services" stipulated in the second paragraph. Although the State Administration of Taxation (SAT) pointed out in its Reply to Recommendation No. 8765 of the Third Session of the Thirteenth National People's Congress that taxpayers should not simply rely on the form of training provided to confirm whether the training is "business income" or "remuneration for labor services", but should combine the "economic substance" of the training with the "business income" and "remuneration for labor services" of the second paragraph. The Response to Recommendation 8765 states that taxpayers should not simply rely on the form of training provided to confirm whether it is "business income" or "remuneration for labor services", but should combine it with the requirement of "economic substance" to make a judgment, but the text does not provide for the refinement of the economic substance, and therefore there is still a certain amount of controversy over the determination of both.

For individual declaration of income, remuneration for labor is subject to a progressive tax rate of 5%-45%, while business income is subject to a progressive tax rate of 5%-35%, and the tax burden is lower if the income is declared according to the business income; in addition, business income and remuneration for labor are calculated separately, and high-income earners are able to split their income into two parts, which effectively lowers the tax burden. Therefore, in practice, high-income people take advantage of the characteristics of certain income nature is more fuzzy, according to the "business income" declaration to achieve the purpose of lower tax burden. However, as the state increases its tax audit efforts and carries out precise audits on key groups and industries, such behavior is easily recognized by the tax authorities as a conversion of the nature of income and is subject to administrative penalties. Meanwhile, readers should be reminded that some types of income have been clarified through regulations, such as the Reply of the State Administration of Taxation on the Individual Income Tax on the Income of Individuals Who Organize Various Learning Classes (Guo Shui Han Fa [1996] No. 658), which clarifies the nature of the "teaching and training fees" involved in this case.

Legal basis: Article 6 of the Regulations for the Implementation of the Individual Income Tax Law:

"...... (Ⅱ) income from remuneration for labor services, refers to the income derived from the performance of labor services, including design, decoration, installation, drafting, laboratory, testing, medical, legal, accounting, consulting, lecturing, translation, review, painting, calligraphy, sculpture, film, sound, video, performance, performance, advertising, exhibitions, technical services, introduction services, brokerage services, agency services and other income derived from labor services.

...... (Ⅴ) Income from business operation:

......2. Income obtained by individuals engaged in schooling, medical care, counseling and other paid service activities in accordance with the law;

......4. income obtained by individuals engaged in other production and business activities."

Risk 3: Applying low tax rate items for declaration to reduce tax burden

Wen Mou is the actual controller of Certain Peak Limited, which is mainly engaged in the assembly and modification of automobiles. In 2022, the tax authorities received a report, and through the retrieval of enterprise data and big data analysis and comparison, they found that the company listed the service fee of about 11 million yuan in the account of other business income and declared it in accordance with the "modern service", which was subject to a tax rate of 6%. After investigation, the tax authorities found that the income belonged to the income from automobile assembly and modification, which should be calculated according to the applicable tax rate of 13% for the sale of goods and the provision of processing, repairing and fitting-out services to pay VAT, and concluded that the enterprise constituted a conversion of the nature of the income and false declaration by applying a low tax rate, and recovered the tax amount of nearly 700,000 RMB and imposed a fine of double the amount of the tax.

The behavior of applying low tax rate to reduce tax burden is involved in many industries. In recent years, China's tax law system has been improved continuously, and many tax matters that were once vague have been clarified through laws, regulations and normative documents, which led to a rise in the risk of taxpayers' behavior of applying low tax rate. High-income people may learn through consultation that there is a possibility of applying low tax rates in their business operations, which may lead to administrative audits. High-income earners should actively initiate relief procedures when involved in disputes over related issues in order to avoid irreparable losses.

Risk 4: Shareholders who have not returned loans for a long time and have not filed personal tax returns in a timely manner

An Mou is a director of a silver loan company limited, in 2019, a city tax authorities found after inspection that the company lent 7.7 million yuan to shareholder An Mou from 2011 to 2014, in 2019, An Mou returned 3.6 million yuan, and there is still 4.1 million unreturned and not used for enterprise production and operation, according to the "Ministry of Finance, State Administration of Taxation on the standardization of the management of collection of personal income tax of individual investors According to Article 2 of the Circular of the Ministry of Finance and State Administration of Taxation on Regulating the Administration of Collection of Individual Income Tax for Individual Investors (Cai Shui [2003] No. 158, hereinafter referred to as "No. 158"), "if an individual investor borrows money from the enterprise he invests in (except for sole proprietorships and partnerships) within the taxable year, and does not return the money to the enterprise nor use it for the production and operation of the enterprise, the borrowed money which is not returned can be regarded as the enterprise's contribution to the enterprise's production and operation. The unreturned loan can be regarded as dividend distribution from the enterprise to the individual investor, and be subject to individual income tax in accordance with the item of "Interest, Dividend, and Bonus Income." The enterprise was required to pay the withholding tax on behalf of the individual income tax and imposed a fine of 50%.

In this case, the company borrowed money to the shareholders personally, and the shareholders did not return the money after the end of the tax year and did not use it for the company's operation to recover the individual income tax, according to the "Measures for the Administration of the Individual Income Tax" (Guoshuifa 〔2005〕 No. 120, hereinafter referred to as "No. 120"), the provisions of Article 35 (4) "Strengthening the management of individual investors' loans from their investment enterprises, and levying taxes in strict accordance with the relevant provisions on loans with a term of more than one year and not used for the production and operation of the enterprises". In practice, shareholders for personal needs to borrow from the enterprise, or enterprises for the purpose of reducing the tax burden by borrowing the form of middle and senior salaries, may not be timely repayment and not timely tax declaration and triggered by the tax authorities of the audit.

Readers are reminded that Article 158 stipulates that the period during which a shareholder's loan is not required to file tax return is "the tax year", therefore, the term "more than one year" in Article 120 refers to the tax year in which the loan is made, and is not based on the actual borrowing period, i.e. Shareholders borrowed from the company on December 1, December 31, not repaid, should also be declared tax; In addition, there are views that individual shareholders borrowing the year the company must have a sufficiently large amount of distributable profits, in order to be treated as dividends. However, according to the mainstream view of the current administrative authorities, as well as the academic community for the tax law to adjust the understanding of commercial subjects, distributable profits are generally not as individual shareholders borrowing tax issues to consider the object, so high-income people in the handling of borrowing issues between the enterprise should be clear about the relevant tax provisions to reduce tax risks.

Risk 5: Split income, false invoicing to avoid taxation

Lu is the legal representative and actual beneficiary of a certain Cheng Automobile Sales Co. Ltd. and sells ultra-luxury small cars to the outside world, and at the end of 2022, the tax authorities found that it issued a large number of VAT special invoices and ordinary invoices for maintenance fees during the examination of the electronic invoices of the enterprise, and in the course of the audit, it was found that: the enterprise sells ultra-luxury small cars to the outside world with the actual price of the car (excluding tax) higher than 1.3 million yuan from 2018 to 2022 The enterprise sold ultra-luxury cars to the public from 2018 to 2022 at an actual car price (excluding tax) higher than RMB1.3 million, but declared to pay VAT by issuing uniform sales invoices for motor vehicles at a price lower than RMB1.3 million (excluding tax), and issued VAT special invoices or ordinary VAT invoices for labor and maintenance fees to the buyer for the remaining purchase price, or issued VAT special invoices or ordinary VAT invoices for "labor and maintenance fees" to the purchaser from a third party. In addition, the company also engaged in the act of splitting the sales proceeds from the sale of vehicles, such as crediting the sales proceeds that should have been credited to December 2018 (subject to VAT at 16%) and credited to the revenue in April 2019 (subject to VAT at 13%). The tax authorities determined that its actions constituted tax evasion, false invoicing and illegal provision of invoices resulting in loss of tax, and required the enterprise to pay back taxes and penalties totaling approximately RMB 5.5 million.

This case involves tax evasion and false invoicing. According to the Notice on Matters Relating to the Additional Consumption Tax on Ultra-Luxury Small Cars (Cai Shui [2016] No. 129) issued by the Ministry of Finance and the State Administration of Taxation, which specifies that passenger cars and medium and light commercial buses with a retail price of RMB 1.3 million (excluding value-added tax) and above per vehicle should pay consumption tax in the retailing segment, Lu, by splitting the contract payment, divided the price of the vehicle by splitting the contract sum into several parts and issuing uniform sales invoices for motor vehicles at an amount lower than 1.3 million yuan to evade the consumption tax obligation; and then, by fictitious services, collecting the remaining sum in the form of labor and maintenance fees and issuing VAT invoices for labor and maintenance services to realize the splitting of the income from the sale of the vehicles; in addition, this case also involves the unlawful provision of invoices to the taxpayers, withholding agents, or others who provide convenience to the vehicle purchasers. facilitate the vehicle purchaser, resulting in the vehicle purchaser underpaying the vehicle purchase tax causing loss of state tax.

Under the current strict tax supervision posture, the state has repeatedly declared that it will crack down on tax evasion and false invoicing. The tax planning adopted in the course of business operation to reduce the tax burden not only involves a lot of administrative risks, but also the act of issuing VAT invoices for fictitious transactions may be suspected of the crime of false invoicing, which will result in the conversion of the case into a criminal one, and the main person-in-charge of the enterprise will face imprisonment for this reason. Therefore, entrepreneurs should take the initiative to check their own tax-related risks and seek professional advice as early as possible in cases involving false invoicing.

Risk 6: Splitting wages into the names of dependent employees to reduce the tax burden

Yu Mou and Li Mou are the managers of a leisure goods company, and the local tax bureau's inspection bureau found that Yu Mou and Li Mou had under-declared their personal income tax payment by splitting their salaries, including Zhang Mou, Chen Mou and Yue Mou in the payroll roster, and then splitting their actual salaries into multiple names, and then remitting them to Yu Mou and Li Mou's name to achieve the purpose of under-payment of personal income tax. The Audit Bureau determined that the company's false listing of wages and bonuses belonged to the fabrication of false tax basis, and ordered the company to make corrections within a period of time and imposed a fine, and the company, as a withholding agent, should be withheld but not withheld the individual income tax was imposed a fine of 60%.

This case is to include non-corporate personnel in the name of the company, and to reduce the personal income tax burden of the middle and high level personnel by allocating their salary income to the said personnel. In practice, some companies agreed with the middle and senior management of the salary is the after-tax salary, and the middle and senior management of the salary accounted for a large proportion, the enterprise needs to bear a heavier personal tax burden, so choose to reduce the corporate tax burden by splitting the form of wages. However, in the environment of multi-departmental joint management of tax evasion, the behavior is very easy to cause the tax authorities to audit, at the same time, on January 17, 2023, the Ministry of Human Resources and Social Security announced the "Social Insurance Fund Supervision and Reporting Work Management Measures" (Ministry of Human Resources and Social Security Decree No. 49), which makes it clear that the behavior of employee affiliation may constitute insurance fraud. So far, high-income people splitting income will not only face tax-related administrative risks, but also may constitute a criminal offense.

Risk 7: False Transactions to Cash Out Salaries

When a municipal tax inspection department implemented an inspection of L Company's personal income tax withholding and payment in 2018, it discovered two salary and bonus payment schedules of the enterprise, one of which contained the same data as recorded in the books and statements, but the other had data that was not recorded in the books and statements. The inspectors suspected that the enterprise paid employees' salaries and bonuses by means of a private "small treasury", in order to achieve the purpose of withholding less personal income tax.

Upon inspection, it was found that the funds in the suspicious statements came from the personal bank card accounts opened by the heads of nine business departments of Company L in the bank, and the enterprise paid salaries and bonuses amounting to more than 30 million yuan through these nine personal bank cards. Subsequently, inspectors verified the company's corporate clients located in Shanghai and Hangzhou. The inspectors found that the downstream corporate clients had invoiced Company L in the name of design fees, and Company L had paid business payments to each other's unit accounts by bank transfers, but each time the other party would remit a similar amount of funds to the nine bank card accounts of the department heads of Company L shortly after the receipt of the payments, and part of the funds would then be transferred from the department head's bank card to the personal accounts of the other employees.

Eventually, in order to pay less personal income tax, L company department heads to open personal bank accounts in the form of private "small treasury", through the fictitious business, false invoicing and reporting methods, to extract funds off the books to the department employees to issue bonuses, in order to avoid paying taxes, less withholding of personal income tax of nearly 5.3 million yuan. In response to the illegal behavior, a city tax authority made the treatment of Company L to pay back taxes and fees, add late payment fees and impose a fine penalty according to the law.

Individual tax evasion by fabricating false transactions is also a common problem faced by high-income groups. In order to achieve the purpose of paying less individual income tax, some enterprises sign contracts with service companies to make up fictitious transactions, commonly such as signing a labor dispatch contract with a labor dispatch company, and under the cover of ostensibly purchasing a certain service, transferring wages and salaries to be paid to executives and employees to the service company, and then cashing out the wages and salaries to the enterprise executives and employees by the service company, once investigated by the tax bureau, it will be faced with the punishment of paying back taxes, late payment processing and fines Once investigated by the tax bureau, the company will face penalties of back taxes, late payment and fines.