The Chinese State Administration of Taxation (SAT) began its crackdown on income tax evasion when Circular 120, Administrative Measures for PRC Individual Income Tax, took effect on October 1, 2005.  Circular 120, issued in July 2005, outlines a number of new provisions to standardize the collection and enforcement of individual income tax in China. 

The Administrative Measures require all companies and individuals, including expatriates working in China, to report all income to the tax bureaus.  Tax bureaus will be required to create files for every individual taxpayer and for every income tax withholding entity, so that the two sets of records can be reconciled for any discrepancies.  In addition, the Measures call for greater digitization of data and coordination across government agencies to develop more complete profiles for each taxpayer.  In particular, cross-referencing individual income tax data with immigration data will allow the tax authority to determine who owes income tax and the amount they owe.  Individuals who evade tax payments, for example, may be prevented from leaving the country. 

Another provision targets high income-earning individuals, such as celebrities, athletes, entertainers, and high-level executives.  In the past, some of these high income individuals, including expatriates living in China, have been able to evade tax collection by underreporting their income.  These high net worth individuals will now be scrutinized and supervised more carefully. 

Tax collection in China has not been an efficient process, with many loopholes allowing people to escape tax payments and lax enforcement.   Individuals were "trusted" to pay the proper amount of income tax, and there was no individual income monitoring system.  There was also no communication among the tax bureaus, immigration authorities, and other government entities.  

To move towards a more standardized and efficient income tax collection system, the Chinese government implemented a tax amnesty program last year.  The program allowed foreign companies that owed back taxes to come forward and pay their outstanding tax bills without incurring any penalties.  In addition, the minimum income threshold for tax exemption was recently increased from RMB800/month ($99) to RMB1,500/month ($185) to give tax relief to the very poor.