In a bid to boost consumption and combat the effects of a rising cost of living, the Chinese Government has adopted a revised version of the Individual Income Tax (IIT) legislation it first introduced last year.
The revised legislation was approved at the end of a five-day bi-monthly session of the National People's Congress (NPC) Standing Committee more quickly than anticipated, possibly due to the ongoing trade war with the US. The new law will come into effect on 1 January 2019, although some clauses, including the new minimum threshold for personal income tax exemption, will come into force on 1 October this year.
Since implementing the new legislation last year, the amount of IIT revenue collected by the Government has increased by 19.6% on the previous 12 months, outpacing both per capita income and GDP growth, which stood at 7.3% and 6.9% respectively.
But the new changes are intended to further ease the tax burden on lower-income employees in particular. They are also meant to signal a tougher stance towards both foreign workers and high-earners and will:
- Raise the IIT threshold;
- Consolidate different income categories;
- Introduce new deductible expenses;
- Tighten how the IIT is applied and enforced.
Foreign companies will now need to pay special attention to any changes affecting when the tax is levied on foreign employees, foreign labour costs, contract profitability and budgeting requirements. They may also see ripple effects on withholding and tax equalisations.
The changes
The new law introduced a raft of new changes that will affect each level of the IIT system as they relate to calculation, application and enforcement. The key amendments are summarised below:
Calculating liability
The IIT liability for resident taxpayers will now be calculated on an annual rather than monthly basis, while the IIT liability for non-residents will continue to be calculated monthly or as taxable income arises.
But employers should also note that they are still obliged to withhold IIT on behalf of their employees on a monthly basis. If IIT-paying individuals have additional tax or tax returns to claim by the year end, they can do so via a final settlement process.
Consolidated ‘taxable income’
In general terms, the new legislation alters the grouping and tax rates that apply to different types of ‘income’.
Most significantly, the 3.45% progressive tax rate has been increased to cover income beyond traditional wages and salaries earned as a result of employment. Individuals who provide independent personal services will find that their remuneration and royalties (collectively known as ‘Comprehensive Income’) are also subject to the 3.45% progressive tax too.
This means that more tax is likely to be levied on income belonging to this category as the progressive rates (calculated in accordance with a number of different tax brackets) will now apply to the aggregate amount of the four types of Comprehensive Income rather than just ‘wages and salaries.’
Three income types that were traditionally taxed at a flat rate of 20% will now be taxed at progressive rates based on their tax brackets. Therefore, if the aggregate of ‘Comprehensive Income’ exceeds RMB 25,000 (US$3,670) per month, the tax rate will be higher than the 20% flat rate that previously applied.
See a summary of the changes in the table below:
IIT rates for foreigners
Expatriates living and working in China will now be subject to the 183-day test, a rule that draws upon recognised international practice. The test accords a foreign individual who has lived in China for 183 days or more in a single year with ‘residency’ status and subjects them to Chinese tax on their worldwide income. The tax year runs from 1 January to 31 December.
This new 183-day-test will replace the previous five-year-rule, under which a foreign worker was subject to Chinese tax on their worldwide income if they had lived in China for more than five years.
In addition, IIT liability currently contains a well-known loophole whereby foreigners can ‘reset the clock’ and avoid paying income tax by leaving the country for an aggregate of 91 days per year, or more than 31 days consecutively. But the law will remove this loophole, thereby making it harder to avoid paying tax in this way.
Deductibles
For resident taxpayers, the new legislation will boost personal deduction levels on comprehensive income from RMB 3,500 (US$514) to RMB 5,000 (US$734) per month, which will increase the annual threshold to RMB 60,000 (US$8,807) per year.
Resident taxpayers will also be allowed to deduct certain additional items from their Comprehensive Income. These items are categorised as ‘additional itemised deductions for specific expenditures’ and include:
- Education expenses for children;
- Caring for the elderly;
- Cost of further education;
- Healthcare costs for serious illness;
- Housing loan interest;
- Housing rent.
The RMB 5,000 (US$734) per month standard deduction will also apply to non-resident taxpayers and replace the current RMB 4,800 (US$705) deduction. But deductible allowances for foreigners will no longer be available.
The State Council will set the range, standards and enforcement rules for special expense deductions, before reporting to the NPC Standing Committee.
Tax brackets
For Comprehensive Income taxpayers: As the lower tax brackets have been expanded, it means that lower tax rates will henceforth apply to a wider range of income levels. Higher tax brackets will remain the same.
In practical terms, this means that more people will pay lower IIT rates. For example, under the old system, an individual with a taxable income (after deductions) of RMB 10,000 (US$1,468) per month would be subject to a 25% tax rate, which would mean they paid RMB 1,495 (US$219) each month. Assuming their taxable income remained consistent, they would pay RMB 17,940 (US$2,634) in IIT over the course of a full year.
Under the new system, an individual with the same taxable income will be subject to a 10% tax rate but will only need to pay a RMB 9,480 (US$1,392) (RMB 790 x 12 months) levy each year. This means they would pay just over half of the previous tax amount, saving themselves RMB 8,460 (US$1,242) per year.
For operational income taxpayers: All tax brackets will be broadened out as outlined in the table below:
Enforcement
The new legislation will give the tax authorities additional powers to enforce tax liabilities on transactions involving non-arm’s length asset transfers, offshore tax avoidance schemes and commercial arrangements from which inappropriate tax benefits are obtained.
Although limited details have been provided so far, there have been hints about adopting general anti-avoidance rules similar to those currently used to enforce Chinese Corporate Income Tax Laws.
Planning for change
The new law forms part of a wider series of tax reforms that are currently being implemented by the Chinese authorities in order to boost consumption in a slowing economy. Tax cuts of more than RMB 800 billion (US$117 billion) have been promised in 2018, which are expected to reduce government revenues by over 5% while benefiting the Chinese working class. The adoption of an annual levy system and the 183-day residence rule also mark a gradual shift towards more international taxation practices.
But organisations that employ expatriates and foreign workers would be advised to assess the implications of these changes and plan ahead in order to manage any potential consequences.
By Dorcas Wong.
This article was first published on China Briefing.
Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email us at info@dezshira.com. Further information about our firm can be found at: www.dezshira.com.
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In a bid to boost consumption and combat the effects of a rising cost of living, the Chinese Government has adopted a revised version of the Individual Income Tax (IIT) legislation it first introduced last year.
The revised legislation was approved at the end of a five-day bi-monthly session of the National People's Congress (NPC) Standing Committee more quickly than anticipated, possibly due to the ongoing trade war with the US. The new law will come into effect on 1 January 2019, although some clauses, including the new minimum threshold for personal income tax exemption, will come into force on 1 October this year.
Since implementing the new legislation last year, the amount of IIT revenue collected by the Government has increased by 19.6% on the previous 12 months, outpacing both per capita income and GDP growth, which stood at 7.3% and 6.9% respectively.
But the new changes are intended to further ease the tax burden on lower-income employees in particular. They are also meant to signal a tougher stance towards both foreign workers and high-earners and will:
- Raise the IIT threshold;
- Consolidate different income categories;
- Introduce new deductible expenses;
- Tighten how the IIT is applied and enforced.
Foreign companies will now need to pay special attention to any changes affecting when the tax is levied on foreign employees, foreign labour costs, contract profitability and budgeting requirements. They may also see ripple effects on withholding and tax equalisations.
The changes
The new law introduced a raft of new changes that will affect each level of the IIT system as they relate to calculation, application and enforcement. The key amendments are summarised below:
Calculating liability
The IIT liability for resident taxpayers will now be calculated on an annual rather than monthly basis, while the IIT liability for non-residents will continue to be calculated monthly or as taxable income arises.
But employers should also note that they are still obliged to withhold IIT on behalf of their employees on a monthly basis. If IIT-paying individuals have additional tax or tax returns to claim by the year end, they can do so via a final settlement process.
Consolidated ‘taxable income’
In general terms, the new legislation alters the grouping and tax rates that apply to different types of ‘income’.
Most significantly, the 3.45% progressive tax rate has been increased to cover income beyond traditional wages and salaries earned as a result of employment. Individuals who provide independent personal services will find that their remuneration and royalties (collectively known as ‘Comprehensive Income’) are also subject to the 3.45% progressive tax too.
This means that more tax is likely to be levied on income belonging to this category as the progressive rates (calculated in accordance with a number of different tax brackets) will now apply to the aggregate amount of the four types of Comprehensive Income rather than just ‘wages and salaries.’
Three income types that were traditionally taxed at a flat rate of 20% will now be taxed at progressive rates based on their tax brackets. Therefore, if the aggregate of ‘Comprehensive Income’ exceeds RMB 25,000 (US$3,670) per month, the tax rate will be higher than the 20% flat rate that previously applied.
See a summary of the changes in the table below:
IIT rates for foreigners
Expatriates living and working in China will now be subject to the 183-day test, a rule that draws upon recognised international practice. The test accords a foreign individual who has lived in China for 183 days or more in a single year with ‘residency’ status and subjects them to Chinese tax on their worldwide income. The tax year runs from 1 January to 31 December.
This new 183-day-test will replace the previous five-year-rule, under which a foreign worker was subject to Chinese tax on their worldwide income if they had lived in China for more than five years.
In addition, IIT liability currently contains a well-known loophole whereby foreigners can ‘reset the clock’ and avoid paying income tax by leaving the country for an aggregate of 91 days per year, or more than 31 days consecutively. But the law will remove this loophole, thereby making it harder to avoid paying tax in this way.
Deductibles
For resident taxpayers, the new legislation will boost personal deduction levels on comprehensive income from RMB 3,500 (US$514) to RMB 5,000 (US$734) per month, which will increase the annual threshold to RMB 60,000 (US$8,807) per year.
Resident taxpayers will also be allowed to deduct certain additional items from their Comprehensive Income. These items are categorised as ‘additional itemised deductions for specific expenditures’ and include:
- Education expenses for children;
- Caring for the elderly;
- Cost of further education;
- Healthcare costs for serious illness;
- Housing loan interest;
- Housing rent.
The RMB 5,000 (US$734) per month standard deduction will also apply to non-resident taxpayers and replace the current RMB 4,800 (US$705) deduction. But deductible allowances for foreigners will no longer be available.
The State Council will set the range, standards and enforcement rules for special expense deductions, before reporting to the NPC Standing Committee.
Tax brackets
For Comprehensive Income taxpayers: As the lower tax brackets have been expanded, it means that lower tax rates will henceforth apply to a wider range of income levels. Higher tax brackets will remain the same.
In practical terms, this means that more people will pay lower IIT rates. For example, under the old system, an individual with a taxable income (after deductions) of RMB 10,000 (US$1,468) per month would be subject to a 25% tax rate, which would mean they paid RMB 1,495 (US$219) each month. Assuming their taxable income remained consistent, they would pay RMB 17,940 (US$2,634) in IIT over the course of a full year.
Under the new system, an individual with the same taxable income will be subject to a 10% tax rate but will only need to pay a RMB 9,480 (US$1,392) (RMB 790 x 12 months) levy each year. This means they would pay just over half of the previous tax amount, saving themselves RMB 8,460 (US$1,242) per year.
For operational income taxpayers: All tax brackets will be broadened out as outlined in the table below:
Enforcement
The new legislation will give the tax authorities additional powers to enforce tax liabilities on transactions involving non-arm’s length asset transfers, offshore tax avoidance schemes and commercial arrangements from which inappropriate tax benefits are obtained.
Although limited details have been provided so far, there have been hints about adopting general anti-avoidance rules similar to those currently used to enforce Chinese Corporate Income Tax Laws.
Planning for change
The new law forms part of a wider series of tax reforms that are currently being implemented by the Chinese authorities in order to boost consumption in a slowing economy. Tax cuts of more than RMB 800 billion (US$117 billion) have been promised in 2018, which are expected to reduce government revenues by over 5% while benefiting the Chinese working class. The adoption of an annual levy system and the 183-day residence rule also mark a gradual shift towards more international taxation practices.
But organisations that employ expatriates and foreign workers would be advised to assess the implications of these changes and plan ahead in order to manage any potential consequences.
By Dorcas Wong.
This article was first published on China Briefing.
Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email us at info@dezshira.com. Further information about our firm can be found at: www.dezshira.com.
OTHER ARTICLES THAT MAY INTEREST YOU
Expats in China: Deciphering the rules on individual income tax
Understanding marriage leave in China
Z and M visa issues: Seven things to be aware of when employing foreign staff in China
