Announcement No. 1 provides enhancements to some of the procedures relating to the Annual Reconciliation to help ensure that the rights and interests of individual taxpayers are safeguarded. It also aims to enhance administrative measures to enforce personal tax compliance. We highlight some of the key considerations for employers and individual taxpayers, in preparation for the 2021 Annual Reconciliation filing season:
1. Employers are encouraged to review and improve their internal administration processes based on guidelines under prevailing tax law and regulations, and specific requirements of the employee population to:
- remind employees of the potential outcome of being non-compliant with personal income tax;
- assist employees with assessing and/or preparing their Annual Reconciliation by providing adequate training and support;
- retain relevant documents to support the 2021 Annual Reconciliation in case of future tax audits.
2. Announcement No. 1 emphasises that assessment of the 2021 Annual Reconciliation will be based upon an individual taxpayer’s 2019 and 2020 Annual Reconciliation filing status and record. Therefore, individual taxpayers are encouraged to review the status of their prior-year Annual Reconciliation before commencing preparation of 2021 Annual Reconciliation, to help ensure accurate and timely submissions of the 2021 Annual Reconciliations. A taxpayer’s personal credit rating may be adversely impacted due to non-compliance with personal tax.
3. Announcement No. 1 also explicitly states that an Annual Reconciliation filing requirement is imposed on an individual taxpayer when the withholding agent did not fulfil the tax withholding obligation. This is to raise taxpayer awareness of keeping personal tax affairs in order, by not only providing employers with accurate personal information, but also proactively reviewing their tax filing status, and making necessary adjustments during the Annual Reconciliation. At the same time, employers should timely update employee personal information to foster timely and accurate tax withholding.
4. Notwithstanding that Announcement No.1 does not explicitly address the declaration of overseas income, it is anticipated that this will continue to be a key area of focus when it comes to personal tax compliance, in particular with respect to how to enhance personal tax compliance, and the “going abroad” strategy of Chinese enterprises. Enterprises should remind employees with overseas income to complete Annual Reconciliation timely and provide guidance and support where needed.
In view of the complexity involved with Annual Reconciliation, employers and individual taxpayers are also advised to consider seeking professional support to help ensure that their obligations are fulfilled in a timely manner.
KPMG in China will continue to closely follow developments concerning relevant policies and practices relating to Annual Reconciliation, and share our insights.
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