On February 1st, the State Administration of Taxation issued the "Announcement on Handling Matters concerning the Comprehensive Income Tax Settlement and Payment for Individuals in 2023", clarifying the service and administration matters related to the 2023 annual tax settlement.

1. What is the annual settlement?

The annual settlement refers to the process where taxpayers sum up their annual income from sources such as wages, remuneration for labor services, remuneration for copyrights, and royalties, deduct annual expenses and deductions, calculate the taxable income according to the annual comprehensive income tax rate table, deduct the tax already prepaid during the year, and submit the annual tax return to the tax authorities to settle the refund or additional tax payment. In short, it is a process of "checking omissions, summarizing income and expenses, calculating taxes annually, and refunding or paying the balance" based on the pre-paid taxes. This has been a requirement since 2019 when China established a comprehensive and classified individual income tax system, in line with international practices.

It should be noted that:

Firstly, the subject of annual settlement refers only to resident individuals as defined by the personal income tax regulations. Non-resident individuals do not need to go through annual settlement.

Secondly, the scope and content of the annual settlement only include the four types of income within the scope of comprehensive income, namely wages, remuneration for labor services, remuneration for copyrights, and royalties. Income from interest, dividends, and property leases, among other classified incomes, are not included in the annual settlement. Also, income that taxpayers obtain and are not required to be included in the comprehensive income tax calculation is not within the scope of annual settlement according to relevant documents.

2. Why is it necessary to conduct annual settlement?

Firstly, annual settlement can better protect the legitimate rights and interests of taxpayers. For example, some deduction items, such as major medical expenses in the special additional deduction, can only be accurately determined at the end of the year, requiring supplementation for deduction.

Secondly, through annual settlement, taxpayers can more accurately calculate their annual personal income tax liability. Generally, for taxpayers with multiple sources of income, no matter what prepayment method is used, it is impossible to make the prepaid tax amount exactly match the annual tax payable amount. In such cases, there will be a "difference" between the two, which needs to be adjusted through annual settlement.

3. Who needs to conduct annual settlement?

Generally, as long as the prepaid tax amount of taxpayers does not match the annual tax payable amount, annual settlement is required. According to relevant provisions such as the Personal Income Tax Law and its implementation regulations, the situations requiring annual settlement can be divided into several categories:

The first category is taxpayers who need to apply for a tax refund because the prepaid tax amount exceeds the tax payable amount. Applying for a tax refund is the right of taxpayers. As long as the prepaid tax amount exceeds the tax payable amount for the tax year, taxpayers can apply for annual settlement tax refund according to law.

The second category is taxpayers who need to make additional tax payments and the amount exceeds RMB 400.

The third category is taxpayers who failed to declare or under-declared comprehensive income for 2023 due to errors in applying income items or failure of withholding agents to fulfill their withholding obligations. They should conduct settlement in accordance with the law.

4. Who does not need to conduct 2023 annual settlement?

According to the Personal Income Tax Law and its implementation regulations, those who do not need to conduct annual settlement mainly include the following situations:

The first category is taxpayers whose prepaid tax amount matches the annual tax payable amount. These taxpayers do not need to apply for tax refunds and therefore do not need to conduct annual settlement.

The second category is taxpayers whose annual income from January 1, 2023, to December 31, 2023, does not exceed RMB 120,000 or whose additional tax amount does not exceed RMB 400. They are exempt from annual settlement. It should be noted that taxpayers who have withholding agents failing to withhold and pay taxes according to the law are not exempt from annual settlement.

5. When should taxpayers conduct annual settlement?

The time for annual settlement for 2023 is from March 1st to June 30th, 2024. Among them, for taxpayers without domicile in China who leave the country in advance, they can conduct annual settlement before leaving the country. Taxpayers who need to settle during the early settlement period (March 1st to March 20th) can make appointments for any day during this period after February 21st through the personal tax APP. From March 21st to June 30th, taxpayers do not need to make appointments and can conduct settlement at any time. It should be noted that, to help taxpayers complete annual settlement efficiently, reasonably, and orderly, the tax authorities will notify and remind taxpayers in batches and stages through certain methods to conduct settlement during the designated time periods. Taxpayers are advised to conduct settlement within the agreed time to avoid tax processing congestion and affect the tax filing experience.

6. How should taxpayers conduct settlement?

There are mainly three ways to conduct settlement:

Firstly, taxpayers can conduct settlement by themselves. The tax authorities provide efficient and convenient online tax channels. Taxpayers are advised to prioritize using the online tax bureau to conduct annual settlement, especially through the personal tax APP. For special groups such as the elderly and people with mobility difficulties who have difficulty completing the settlement independently, taxpayers can apply, and the tax authorities can provide personalized annual settlement services.

Secondly, taxpayers can entrust their employing units to handle the settlement. If taxpayers request their employing units to handle the settlement, the units should handle it, or provide training and guidance to taxpayers to complete the annual settlement declaration and tax refund (additional tax) through online tax bureau.

Thirdly, taxpayers can entrust tax professionals, other organizations, or individuals to handle the settlement.

7. What documents do taxpayers need to submit for annual settlement?

Taxpayers can prioritize conducting settlement through the personal tax APP and website, where the tax authorities will provide pre-filled services for declaration items. In general, taxpayers do not need to provide other documents. If it is necessary to modify personal basic information, or add deductions or tax preferences, relevant information and supporting materials should be submitted as required. Taxpayers should carefully check to ensure that the information provided is true, accurate, and complete.

8. What new optimization services and measures have been introduced for this year's settlement?

This year, on the basis of continuing to optimize tax-related services, the settlement has introduced the following facilitation measures:

Firstly, further expand the scope of priority tax refund services. For taxpayers with annual income below RMB 60,000 who have prepaid individual income tax, in addition to the previous services provided by the personal income tax APP and the Natural Person Electronic Tax Bureau for simple declaration and rapid processing, priority tax refund services will be further provided, continuously enhancing the sense of acquisition of taxpayers.

Secondly, further expand the pre-filled service of settlement declaration items. Based on the medical expenses data and personal pension data shared by the National Medical Security Administration and the Ministry of Human Resources and Social Security to the tax authorities, pre-filled services for major medical expenses special additional deduction information and personal pension information will be provided to taxpayers, providing a better declaration experience for taxpayers.

Thirdly, further optimize the operation experience of taxpayers using the personal tax APP. Upgrading the version of the personal tax APP, reconstructing the channel pages, redesigning the function icons to avoid the crossover of business functions, integrating the display of processing and inquiry items, highlighting the "to-do" prompts, and making the taxpayer experience more friendly.

9. What regulatory measures have been taken to strengthen special additional deductions this year?

On August 31, 2023, the State Council issued the "Notice on Increasing the Standards of Special Additional Deductions for Personal Income Tax" (Guo Fa [2023] No. 13), raising the standards for the special additional deductions for child care, education, and support for the elderly. After the standards are raised, most taxpayers will automatically offset the tax payable amount for the year in subsequent months according to the new standards. However, a small number of taxpayers may not be able to fully offset the tax payable amount during the withholding stage, or choose not to report deductions during the withholding stage, which requires reporting during the 2023 annual settlement.

In terms of tax administration, the tax authorities found that a small number of taxpayers incorrectly or even falsely reported special additional deductions. For situations where special additional deductions are not reported according to regulations, such as both spouses reporting child education special additional deductions at 100% proportions or tampering with supporting materials to enjoy major medical treatment special additional deductions, once discovered, the tax authorities will provide prompts and reminders through the personal tax APP, website, or withholding agents. Taxpayers who newly enjoy deductions or tax preferences should report relevant information and provide supporting materials together. Taxpayers who refuse to correct or explain the situation will have their special additional deductions suspended according to the Announcement of the Ministry of Finance and the State Administration of Taxation on Relevant Policy Issues concerning the Comprehensive Income Tax Settlement and Payment of Personal Income Tax (No. 94 of 2019). Taxpayers can continue to enjoy special additional deductions after correcting relevant information or explaining the situation according to regulations.

10.. What regulatory measures will be taken for taxpayers who fail to declare additional taxes or pay insufficient additional taxes?

Taxpayers who need to pay additional taxes for settlement but fail to declare or underpay them after the settlement period ends will be ordered to correct them within a time limit by the tax authorities according to the law. Relevant tax documents will be delivered to taxpayers through electronic delivery channels such as the personal tax APP and website if they have signed the "Confirmation of Electronic Delivery of Tax Documents". For those who have not signed the "Confirmation of Electronic Delivery of Tax Documents", other delivery methods will be used. At the same time, late payment fees will be levied according to the law, and the tax payment status will be marked in the taxpayers' personal income tax "Tax Payment Records".