State Administration of Taxation
                                                  GSH [2006] No.1200

To the local tax authorities of each province, autonomous region, municipality directly under the Central Government and city with separate planning, and the state tax authorities of Tibet and Ningxia autonomous regions:

After the issuance of the Circular of State Administration of Taxation on Printing and Distributing the Self-Declaration Rules Concerning Individual Income Tax (Provisional) (GSF[2006] No.162, hereinafter referred to as “Rules”), some regions asked that the provisions on calculation of annual income of over RMB120,000 be further clarified. Some related issues are hereby set out below:

1.      Apart from the provisions on calculation of annual income set forth in Articles 6, 7 and 8 of the Rules, taxpayers with annual income of over RMB120,000 shall calculate annual income in accordance with the following provisions:

(1)   As for the income from compensation for labor service and royalty, relevant taxes and fees paid by the taxpayer during the provision of labor service or assignment of royalty shall not be deducted. 

(2)   As for the income from lease of property, relevant taxes and fees paid by the taxpayer during the lease of property shall not be deducted; the one-time income from lease of property of more than a year obtained by the taxpayer shall be deemed as the income for the year when the income is actually received.

(3)   As for the income from transfer of house by an individual, if individual income tax is determined by calculation, annual income shall be calculated by converting the actual tax rate (1%, 2% and 3%) into the taxable income rate (5%, 10% and 15%).

(4)   Income from interest on individual savings deposits and enterprise bonds shall be deemed as the income for the year when the income is actually received by the taxpayer.

(5)   As for individually-owned businesses and sole proprietorship investors, if individual income tax is determined by calculation according to the tax rate, the tax rate shall be converted into the taxable income rate to calculate the taxable income.

After investors in a partnership enterprise determine the taxable income according to the above method, partners shall determine their respective taxable incomes according to the allocation proportion provided in the partnership agreement. If the partnership agreement does not provide the allocation proportion, the taxable income shall be determined according to the number of partners and be equally divided among them. If a partner invests in two and more enterprises, the sum of taxable incomes of all enterprises invested by him/her shall be treated as the annual income.

(6)   The income from stock transfer, if the gain exceeds the loss from individual stock transfer, shall be treated as the income to be declared; if the loss exceeds the gain, the income shall be zero.

2.      The above provisions on calculation of annual income are for the convenience of taxpayers in fulfilling the obligation of self-declaration, and only apply to the annual self-declaration of tax by individuals with annual income of over RMB120,000, rather than calculation of tax by individuals. The tax authorities at each level shall publicize and explain to the public the provisions on calculation of annual income of over RMB120,0000.

3.      According to Article 24 of the Rules, “the taxpayer may entrust intermediary agencies or other persons qualified for tax agency service with tax declaration.” The taxpayer with annual income of over RMB120,000, if willing to entrust a qualified tax intermediary agency (hereinafter referred to as “intermediary agency”), withholding agent or other persons with Income Tax Self-Declaration, shall sign an entrustment agreement (contract) on the self-declaration of individual income tax. In addition, the taxpayer shall inform the trustee of all taxable income items, amount of income and tax, etc. in the tax year. The trustee shall add all items and submit the declaration form with the entrustment agreement (contract).

When handling the self-declaration by an intermediary agency, withholding agent or other persons for a taxpayer, the tax authority shall examine the entrustment agreement (contract) on declaration signed between the taxpayer and the trustee. If the entrustment agreement (contract) on declaration is unavailable, the tax authority shall not handle the self-declaration.