The State Taxation Administration recently issued the Announcement on Issues Concerning Individual Income Tax for Practitioners of Law Firms (State Taxation Administration Announcement No. 53 of 2012), further clarifying the applicable standards for the implementation of individual income tax policies on income obtained by practitioners of law firms.
I. Background of the issuance of Announcement No. [2012] 53: Audit-based collection will gradually become the main form of individual income tax collection for law firms
At present, there are differences among various regions in the collection of individual income tax from law firms, including audit-based collection and assessed collection. However, judging from reality and development trends, audit-based collection will gradually become the main form. In 2002, the State Taxation Administration issued the Notice on Strengthening Audit-Based Individual Income Tax Collection for Investors in Law Firms and Other Intermediary Institutions (Guo Shui Fa [2002] No. 123), which emphasized and required that “no region may implement an industry-wide assessed taxation method for law firms,” and that “for law firms that meet the conditions for audit-based collection, audit-based collection of individual income tax shall be implemented.” After the issuance of this notice, the tax authorities of key provinces and cities such as Beijing, Guangzhou, and Shenzhen successively issued documents to strengthen the implementation of audit-based individual income tax collection for partners of law firms. On May 31, 2010, the State Taxation Administration once again required in the Notice on Further Strengthening the Collection and Administration of Individual Income Tax for High-Income Earners (Guo Shui Fa [2010] No. 54) that the competent tax authorities should strengthen the collection and administration of operating income of relatively large partnership enterprises and the like, urge taxpayers to establish account books in accordance with the provisions of laws and administrative regulations, and that individual income tax shall not be levied on appraisal-type intermediary institutions such as lawyers by way of assessed collection. It can thus be seen that the trend of adjustment by the national tax authorities in the method of collecting individual income tax from practitioners of law firms is increasingly accelerating, and the preliminary shift from assessed collection to audit-based collection has already become the general trend. For law firms and practicing lawyers that have long been accustomed to paying taxes under the assessed collection model, failure to make advance arrangements and effective management for tax payment under the audit-based collection model will bring a certain degree of pressure and risk.