Earlier this year, the Chinese government announced the most sweeping restructuring of its institutions in decades. The revamp, which was officially passed by the National People’s Congress (NPC) on 17 March 2018, created seven new ministries and affected the structure of almost every agency at national level.
As a result of the move, from 2019, a single, better-equipped tax bureau will take over sole responsibility for social insurance from HR bureaux, which previously looked after it across many regions. This consolidation is intended to boost both China’s capacity and its willingness to enforce the social insurance regulations more uniformly.
At the same time, the country is also attempting to reduce employers’ social insurance obligations, most notably via an April directive to local governments that they must formulate plans to cut their rates.
Taken together, these actions illustrate China’s desire to simultaneously increase its capacity to collect social insurance while decreasing the amount of social insurance that businesses need to pay. So what should payroll managers make of the situation?
Institutional reform
Broadly speaking, the country’s institutional reform plan aims to streamline government agencies by eliminating any bureaucratic overlap between them and by ensuring the responsibilities of different agencies are more logical. A further goal is to increase central government and Communist Party control over regional governments.
The changes should be viewed within the context of President Xi Jinping’s idea of a “socialist rule of law with Chinese characteristics”, which he presented at the 19th Party Congress in October 2017. This idea espouses stricter and more consistent enforcement of existing laws across the country, leading to less regional variation. The reform of the tax bureau’s structure and responsibilities is a clear example of these policy priorities.
Since the NPC passed the institutional reform plan, the government has issued several notices outlining the new roles and responsibilities of various government agencies in greater detail. They include the ‘Plan for Deepening Reform of Party and State Institutions’, which was released by the Chinese Communist Party’s Central Committee on 21 March 2018.
Article 46 of the Plan states that: “The basic endowment insurance premiums, the basic medical insurance premiums, the unemployment insurance premiums and other social insurance premiums shall be uniformly collected by the tax department.” It also makes clear that the tax bureau will be the sole agency in charge of collecting the premiums right across the country.
In the past, the 1999 ‘Provisional Regulations for the Collection and Payment of Social Insurance Premiums’ ruled that it was possible for either the social insurance agency under the HR bureau, or the tax bureau, to collect social insurance premiums. This ambiguity resulted in considerable regional variations.
But besides removing this ambiguity, changes to the tax bureau’s structure mean its enforcement capabilities will be increased too. Most notably, tax bureaus at both the national and local level were merged as of 15 June 2018. The aim was to centralise and standardise their administration in order to create less regional policy variation.
Furthermore, ‘Leading Party Groups’ within the tax bureau were changed to become ‘Party Committees’, thereby increasing the authority of Communist Party representatives in relation to state bureaucrats. Again, this change allows for a stricter implementation of national policy. When compared with the HR bureau, the tax bureau is also a larger and better-equipped agency to carry out social insurance collection.
Lower social insurance premiums
Although such shifts suggest that enforcement activity in relation to employers’ social insurance obligations will become stricter, China is also simultaneously lowering premiums across the country – a move that also needs to be understood within a wider policy context.
As a result of years of rapid economic growth, land and labour costs have greatly increased, while outstripping productivity gains. Competition from lower-cost jurisdictions such as Vietnam and Indonesia has further slowed down the Chinese economy too.
To deal with these issues, the country has been undertaking a multi-year campaign to enhance its business environment and lower costs for employers. For example, earlier this year, China pledged to cut taxes for businesses and individuals by RMB 800 billion (US$116.51 billion) in 2018, which included reducing its value-added tax rates.
Employer social insurance contributions are also a significant expense, which is why it is another area that the government has targeted for cost alleviation.
On 20 April 2018, the Ministry of Human Resources and Social Security released a ‘Notice on Continuing to Reduce Social Insurance Premium Rates Periodically’ with the Ministry of Finance. The Notice came into effect on 1 May 2018 and requires local governments to make specific plans for reducing social insurance rates.
Since then, several regions have followed through. For example, on 17 May, Shanghai issued a circular saying it would adopt the policy, while also cutting the employment insurance basic rate for various industries by 50%, from 1 May 2018 through to 30 April 2019 depending on the sector.
Besides reducing business levies as a means of stimulating the economy, the reduction of social insurance premiums also complements changes to the tax bureau’s structure. Therefore, while China on the one hand is signalling its intent to take social insurance violations more seriously, on the other, it is also lowering the bar for organisations to comply.
Taking this approach not only helps the country widen its tax base, but also encourages compliance among companies that might otherwise have avoided paying due to high costs.
Steps for HR and payroll managers to take
The outlined changes to China’s social insurance policies provide employers with an opportunity to conduct an internal HR and payroll compliance review.
China’s social insurance system consists of five different kinds of policy – pension, medical, unemployment, maternity, and work injury – and there is also a housing fund. Contribution rates vary widely according to region, but the average contribution rate for employers is 37.25% of an employee’s salary.
While theoretically, all businesses in the country should already be contributing social insurance in accordance with the law, in practice, some contravene the rules.
For example, in the past, an employer might make an agreement with a staff member to pay their social insurance obligations in a different city where the company has another branch or subsidiary.
It was also not uncommon for employers to pay employees a higher salary in exchange for reporting a lower one on paper. This resulted in the employer’s total costs being reduced as their social insurance obligations were lower too. But even if a staff member willingly agrees to such an arrangement, it is still illegal and can expose employers to potential labour disputes.
These types of behaviour will now be subject to more scrutiny by regulators going forward, so failure to comply with such regulations will expose employers to a variety of risks. For instance, if an organisation fails to cover all of its social insurance payments, an employee can opt to terminate their employment contract without prior notice.
They would also have strong grounds to sue if there was evidence an arrangement had been reached in which their employer actively circumvented their social insurance obligations, for example.
Finally, regulators might deem repeated violations of social insurance regulations as “seriously dishonest behaviour”, which could expose businesses to fines, blacklists, and potentially even harsher penalties.
Health checks
As a result of the higher levels of scrutiny they are likely to face, even those employers that believe themselves to be compliant are likewise advised to conduct an HR health check to establish whether their affairs are in order. In this context, it makes sense to analyse, among other things, salary and overtime payments, social insurance contributions, work hour systems, work safety requirements, annual leave and holiday policies.
Organisations that are already compliant but are located in regions where social insurance was formerly collected by the HR bureau should find ways to develop a positive working relationship with their local tax bureau. Such activity includes contacting them to check on the status of any updated policies and ask questions.
But employers should also note that, given the government’s ongoing restructuring of its institutions, there may be a transition period in which local bureaus are unsure of some of their new processes and responsibilities themselves.
From a broader cost perspective, while reduced social insurance obligations will lower costs for employers, labour costs in China are likely to continue their upward trajectory. Workers in Beijing, for example, now make an average of about RMB 8,500 per month (US$1,227), and wages are rising year-on-year.
However, stricter enforcement of social insurance rules may help to level the playing field between Chinese and foreign companies. Historically, domestic companies have been more likely to circumvent their obligations, resulting in proportionately higher costs for their foreign counterparts. But both will now be under greater pressure to comply not only with social insurance obligations, but also with any number of other laws and regulations that were at one time enforced only sporadically or inconsistently.
This article was first published on China Briefing.
By Alexander Chipman Koty, editor.
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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Earlier this year, the Chinese government announced the most sweeping restructuring of its institutions in decades. The revamp, which was officially passed by the National People’s Congress (NPC) on 17 March 2018, created seven new ministries and affected the structure of almost every agency at national level.
As a result of the move, from 2019, a single, better-equipped tax bureau will take over sole responsibility for social insurance from HR bureaux, which previously looked after it across many regions. This consolidation is intended to boost both China’s capacity and its willingness to enforce the social insurance regulations more uniformly.
At the same time, the country is also attempting to reduce employers’ social insurance obligations, most notably via an April directive to local governments that they must formulate plans to cut their rates.
Taken together, these actions illustrate China’s desire to simultaneously increase its capacity to collect social insurance while decreasing the amount of social insurance that businesses need to pay. So what should payroll managers make of the situation?
Institutional reform
Broadly speaking, the country’s institutional reform plan aims to streamline government agencies by eliminating any bureaucratic overlap between them and by ensuring the responsibilities of different agencies are more logical. A further goal is to increase central government and Communist Party control over regional governments.
The changes should be viewed within the context of President Xi Jinping’s idea of a “socialist rule of law with Chinese characteristics”, which he presented at the 19th Party Congress in October 2017. This idea espouses stricter and more consistent enforcement of existing laws across the country, leading to less regional variation. The reform of the tax bureau’s structure and responsibilities is a clear example of these policy priorities.
Since the NPC passed the institutional reform plan, the government has issued several notices outlining the new roles and responsibilities of various government agencies in greater detail. They include the ‘Plan for Deepening Reform of Party and State Institutions’, which was released by the Chinese Communist Party’s Central Committee on 21 March 2018.
Article 46 of the Plan states that: “The basic endowment insurance premiums, the basic medical insurance premiums, the unemployment insurance premiums and other social insurance premiums shall be uniformly collected by the tax department.” It also makes clear that the tax bureau will be the sole agency in charge of collecting the premiums right across the country.
In the past, the 1999 ‘Provisional Regulations for the Collection and Payment of Social Insurance Premiums’ ruled that it was possible for either the social insurance agency under the HR bureau, or the tax bureau, to collect social insurance premiums. This ambiguity resulted in considerable regional variations.
But besides removing this ambiguity, changes to the tax bureau’s structure mean its enforcement capabilities will be increased too. Most notably, tax bureaus at both the national and local level were merged as of 15 June 2018. The aim was to centralise and standardise their administration in order to create less regional policy variation.
Furthermore, ‘Leading Party Groups’ within the tax bureau were changed to become ‘Party Committees’, thereby increasing the authority of Communist Party representatives in relation to state bureaucrats. Again, this change allows for a stricter implementation of national policy. When compared with the HR bureau, the tax bureau is also a larger and better-equipped agency to carry out social insurance collection.
Lower social insurance premiums
Although such shifts suggest that enforcement activity in relation to employers’ social insurance obligations will become stricter, China is also simultaneously lowering premiums across the country – a move that also needs to be understood within a wider policy context.
As a result of years of rapid economic growth, land and labour costs have greatly increased, while outstripping productivity gains. Competition from lower-cost jurisdictions such as Vietnam and Indonesia has further slowed down the Chinese economy too.
To deal with these issues, the country has been undertaking a multi-year campaign to enhance its business environment and lower costs for employers. For example, earlier this year, China pledged to cut taxes for businesses and individuals by RMB 800 billion (US$116.51 billion) in 2018, which included reducing its value-added tax rates.
Employer social insurance contributions are also a significant expense, which is why it is another area that the government has targeted for cost alleviation.
On 20 April 2018, the Ministry of Human Resources and Social Security released a ‘Notice on Continuing to Reduce Social Insurance Premium Rates Periodically’ with the Ministry of Finance. The Notice came into effect on 1 May 2018 and requires local governments to make specific plans for reducing social insurance rates.
Since then, several regions have followed through. For example, on 17 May, Shanghai issued a circular saying it would adopt the policy, while also cutting the employment insurance basic rate for various industries by 50%, from 1 May 2018 through to 30 April 2019 depending on the sector.
Besides reducing business levies as a means of stimulating the economy, the reduction of social insurance premiums also complements changes to the tax bureau’s structure. Therefore, while China on the one hand is signalling its intent to take social insurance violations more seriously, on the other, it is also lowering the bar for organisations to comply.
Taking this approach not only helps the country widen its tax base, but also encourages compliance among companies that might otherwise have avoided paying due to high costs.
Steps for HR and payroll managers to take
The outlined changes to China’s social insurance policies provide employers with an opportunity to conduct an internal HR and payroll compliance review.
China’s social insurance system consists of five different kinds of policy – pension, medical, unemployment, maternity, and work injury – and there is also a housing fund. Contribution rates vary widely according to region, but the average contribution rate for employers is 37.25% of an employee’s salary.
While theoretically, all businesses in the country should already be contributing social insurance in accordance with the law, in practice, some contravene the rules.
For example, in the past, an employer might make an agreement with a staff member to pay their social insurance obligations in a different city where the company has another branch or subsidiary.
It was also not uncommon for employers to pay employees a higher salary in exchange for reporting a lower one on paper. This resulted in the employer’s total costs being reduced as their social insurance obligations were lower too. But even if a staff member willingly agrees to such an arrangement, it is still illegal and can expose employers to potential labour disputes.
These types of behaviour will now be subject to more scrutiny by regulators going forward, so failure to comply with such regulations will expose employers to a variety of risks. For instance, if an organisation fails to cover all of its social insurance payments, an employee can opt to terminate their employment contract without prior notice.
They would also have strong grounds to sue if there was evidence an arrangement had been reached in which their employer actively circumvented their social insurance obligations, for example.
Finally, regulators might deem repeated violations of social insurance regulations as “seriously dishonest behaviour”, which could expose businesses to fines, blacklists, and potentially even harsher penalties.
Health checks
As a result of the higher levels of scrutiny they are likely to face, even those employers that believe themselves to be compliant are likewise advised to conduct an HR health check to establish whether their affairs are in order. In this context, it makes sense to analyse, among other things, salary and overtime payments, social insurance contributions, work hour systems, work safety requirements, annual leave and holiday policies.
Organisations that are already compliant but are located in regions where social insurance was formerly collected by the HR bureau should find ways to develop a positive working relationship with their local tax bureau. Such activity includes contacting them to check on the status of any updated policies and ask questions.
But employers should also note that, given the government’s ongoing restructuring of its institutions, there may be a transition period in which local bureaus are unsure of some of their new processes and responsibilities themselves.
From a broader cost perspective, while reduced social insurance obligations will lower costs for employers, labour costs in China are likely to continue their upward trajectory. Workers in Beijing, for example, now make an average of about RMB 8,500 per month (US$1,227), and wages are rising year-on-year.
However, stricter enforcement of social insurance rules may help to level the playing field between Chinese and foreign companies. Historically, domestic companies have been more likely to circumvent their obligations, resulting in proportionately higher costs for their foreign counterparts. But both will now be under greater pressure to comply not only with social insurance obligations, but also with any number of other laws and regulations that were at one time enforced only sporadically or inconsistently.
This article was first published on China Briefing.
By Alexander Chipman Koty, editor.
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
The impact of China's new social insurance regulations
Expats in China: Deciphering the rules on individual income tax
China takes steps to crack down on tax evasion
