The Chinese authorities have released proposed changes to tax law that may significantly impact how international assignees and long-term expats in the People’s Republic of China (PRC) are taxed. From changes to residency, personal taxation, payroll withholding and tax efficient benefits for assignees, the potential changes are far reaching.
A ‘Protocol of Amendment’ to the Individual Income Tax Law (IIT) of the PRC was approved on 31 August 2018 and will take effective from 1 January 2019. Certain terms will take effective from 1st October 2018 which will impact PRC IIT reporting in China immediately.
Key considerations for taxpayers and their companies
The new tax law and regulations will be widespread and have far-reaching impacts to each taxpayer as well as companies:
- The new law has combined and newly raised ‘comprehensive income’ and ‘operational income’. The amendment of pretax deduction standard will bring a significant impact to taxpayers.
- With regards to comprehensive income, the protocol rules indicate that employer has obligation to withhold and pay taxes on a monthly basis on behalf of employee, while the taxpayer should perform annual tax reconciliation filings where necessary.
- The protocol has extended the scope of deduction items and brought new challenges to employer and taxpayers. The employer should take responsibility to review and verify the accuracy and authenticity for the invoices and documents submitted by the employee as the evidence of the tax deduction. In addition, confidentiality would be another key consideration as the documents of tax deduction such as serious illness expenses, housing loan interests, etc. contain employee’s private and sensitive information. Relevant policy and procedures should be put in place to mitigate the exposure of information.
- The definition of tax resident/non-resident determined by 183 days will impact on the non-PRC-domiciled individuals who stay in China for around 183 days per year. Moreover, it is not yet known whether the existing preferential tax treatment being applicable to foreigners will be amended and is worthy attention.
What’s changing: The detail
Clear definition of PRC tax resident
The new law defines the Chinese domiciles and non-domiciles that live in mainland China for more than 183 days in a tax year (ie calendar year) as ‘China tax resident’. Before this amendment, China tax resident refers to the PRC domiciles or non-domiciles staying a full tax year in mainland China under existing PRC IIT law.
Amended categories of income and tax rates
The protocol defines ‘operational income of the individual businesses’ and ‘contract operational/leasing business operational income to enterprise or public institution’ as ‘operational income.
In addition, the following four categories of income are combined to be ‘comprehensive income. Comprehensive income is applicable of standard deduction of RMB 60,000 per annum and special deductions:
- Salary and wages income
- Labour remuneration income
- Author remuneration income
- Royalties income.
Amended tax rates are applicable to ‘annual income’ compared with previously ‘monthly income’.
Amended standard deduction of comprehensive income
Basic deduction: RMB 60,000/per annum.
Special deduction: social security and housing fund contributed by employee
Additional special deduction: It is proposed that below expense items be deductible before tax for taxpayer who derives comprehensive income:
- tuition fees of children
- adult post-school education fees
- serious illness medical expenses
- housing loan interest payments
- housing rental costs
- support for parents.
The implementation rules and regulations about the above additional special deductions will be announced once the amendment of IIT law is approved by National People’s Congress.
Introduction of anti-tax avoidance terms for the first time
The terms of anti-tax avoidance of IIT is included in the IIT law reform this time. For example, if a PRC-domiciled individual keeps company profit in a company established in a lower tax burden country without distribution of dividend, or make a deal comforts the arm's length principle, or execute an activity without business nature but for tax benefits only, the tax authority shall force tax adjustments in accordance with reasonable method. Meanwhile, a taxpayer is required to perform tax reconciliation filing before changing nationality from China to another country.
Annual reconciliation filing and monthly withholding filing
The withholding agent should generally file the tax return with local tax bureau monthly within fifteen days of the following month which the tax event occurs. As for the requirement of annual reconciliation filing please refer to below table for details:
|If a China tax resident derives comprehensive income||The taxpayer should perform annual reconciliation filing during the period from 1 March to 30 June after the end of the taxable year.|
|If a China tax resident derives operational income||The taxpayer should file the return with the local tax authorities and pay tax within fifteen days after the end of the taxable month or quarter; annual reconciliation filing should be performed by 31 March in the following taxable year.|
|If a taxpayer derives assessable income but the withholding agent did not withhold relevant tax||The taxpayer should perform annual reconciliation filing by 30 June after the end of the taxable year; the tax authorities can set a time limit for the taxpayer to pay the tax owed.|
|If a taxpayer derives overseas income||The taxpayer should perform annual reconciliation filing during the period of 1 March to 30 June after the end of the taxable year.|
For non-residents, a withholding agent shall perform the withholding filing on timely basis and they are not subject to annual reconciliation filing.