In recent years, news of tax avoidance practices by high-income earners in the entertainment industry has attracted widespread attention in China. They have primarily used such means as changing the nature of the income by fictitious business and abusing the policy of being taxed by the approved rate and local tax incentives to reduce the tax burden.

The so-called fictitious business converts the nature of income to reduce the tax burden, that is, converts comprehensive income including wages, salaries, labor remuneration, etc. into operating income or equity investment income. The former is applicable to the highest tax rate of 45%, which is higher than the latter's 35%. In the end, the tax burden was greatly reduced by means of approved tax rate collection.

Verified collection (audit and tax method) refers to the collection method in which the tax authorities check the verified output and sales of the taxable products produced by the taxpayer according to the taxpayer's situation and under normal production and operation conditions, and then collects the tax according to the tax rate stipulated by the tax law. The original intention of the tax law for approved tax rate collection is to simplify the procedures and reduce the cost of collection and management, but in practice, certain individuals use the policy of the approved tax rate collection method to greatly reduce the tax burden by setting up sole proprietorships.

On December 31^st, 2021, the Ministry of Finance and the State Administration of Taxation issued an announcement on issues related to the collection and management of individual income tax (IIT) on operations income from equity investment. The announcement stipulates the following:

1. Sole proprietorship enterprises and partnership enterprises (hereinafter referred to as “sole proprietorship partnership enterprises”) that hold equity investments such as equities, stocks, property shares of partnership enterprises and other equity investments shall all apply the method of audit accounts to levy IIT. 

2. The sole proprietorship partnership enterprise shall, within 30 days from the date of holding the above-mentioned equity investment, take the initiative to report the situation of the equity investment held to the tax authority; if the sole proprietorship partnership enterprise has already held the equity investment before the implementation of this announcement, it shall report to the tax authority related information before the 30^th of January 2022. When the tax authorities receive the information on the equity investments submitted by the sole proprietorship partnership enterprise that has been approved for collection, the tax authority shall adjust the collection method to audit and tax collection. 

3. Where a sole proprietorship partnership fails to truthfully report its equity investment, it shall be dealt with in accordance with the relevant provisions of the Tax Collection and Administration Law.

The introduction of this policy solves the problem of individuals turning individual income into equity income in order to avoid taxation.

This policy also sets out the retrospective principle, which means even if the relevant enterprise has taxed using approved tax rates before January 1^st, 2022, it will be invalid thereafter, and adjusted to the audit and tax collection method.

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