PRC Individual Income Tax Implementation Rules & Related Circulars Finalized

Presenters/Authors
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Article provided in association with Mazars

Summary

  • Highlights of major changes in IIT
  • Expatriates’ tax preferential policy amended
  • Tax authority mobile application
  • Mazars’ view
  • How can BKD and Mazars help you?

In the past month, the Chinese State Administration of Taxation (SAT) has issued various circulars detailing the new rules and regulations on the individual income tax (IIT). The final Implementation Rules and the circulars are to implement the new IIT law passed by the National People’s Congress in August 2018.

  • On December 13, 2018, the State Council released the “Provisional Rules on the Specific Itemized Deduction for IIT Purpose” (Guofa (2018) No. 41) (Circular 41).
  • On December 18, 2018, the State Council finalized and announced the Implementation Rules that would take effect on January 1, 2019.
  • On December 21, 2018, the SAT issued Public Notice (2018) No. 60 (PN 60) laying out the temporary measures dealing with the claiming of itemized deductions.
  • On December 27, 2018, the Ministry of Finance and SAT jointly released the circular Caishui (2018) No. 164 to specify the new tax preferential policies.

We summarize the main changes and implications for individuals below.

HIGHLIGHTS OF MAJOR CHANGES IN IIT

New taxable income categories

The new IIT law has consolidated certain taxable income categories—namely income from salaries and wages, income derived from remuneration for personal services, income derived from remuneration for manuscript and income from royalties—into a category called “comprehensive income.”

The following table shows the details of the new tax rates at on the comprehensive income. The monthly rate is only for reference.

New Text Rates on Comprehensive Income Table

The basis of the taxable income is based on the net salary after deduction of individual social contributions, additional itemized deduction and CNY 5000 on monthly basis.

Based on the new rules, resident individual taxpayers who receive salaries and wages are withheld IIT on accumulated basis per month. If it is found that they pay IIT in excess at year-end, they would apply for a tax refund.

Additional itemized deduction

One of the highlights of the IIT amendments is the addition of six specific itemized deductions. Details are in the following table.

New IIT Itemized Deductions Table

Maximum amount in a tax year

  1. The academic education has to be in China. The program cannot be longer than 48 months and if it is for undergraduate education, the deduction can be claimed by the parents.
  2. The deduction can be claimed by the taxpayer for themself, their spouse or their nonadult child.
  3. The maximum deduction period is 240 months.

EXPATRIATES’ TAX PREFERENTIAL POLICY AMENDED

End of the preferential tax calculation on the so-called “bonus or 13th month” from January 1, 2022

IIT on bonus payments before the amendment of IIT law is calculated out of the normal monthly salary and thus the individual can benefit from a preferential tax calculation method. This rule will be maintained until December 31, 2021. Starting from January 1, 2022, the bonus will be integrated into the IIT calculation on the annual salary.

Change of tax calculation on the stock option derived from listed companies

From January 1, 2019, until December 31, 2021, the IIT on stock options will be calculated separately in the full amount, applying the seven brackets of progressive rate for comprehensive income. The policy after January 1, 2022, is not clear yet and will clarify in the future.

Expatriates’ tax preferential policy

Six-year rule

Under the new IIT laws, an individual who would normally be considered as a nonresident of China due to absence of residential ties could be deemed a Chinese tax resident in a particular year if they have spent 183 days or more in China during the relevant tax year. The individual would then be subject to IIT on their worldwide income in that tax year.

Under the Implementation Rules, for an individual who does not have residential ties in China but is deemed to be a Chinese tax resident under the 183 days presence test, would not be subject to IIT on their worldwide income, as long as these “deemed tax residency” years would not be continuous and exceed six years, and during the six-year period, the individual has been outside China for a single period of more than 30 days. In order to obtain the tax exemption on non-China-sourced income, the individual needs to file with the relevant tax authority for records. The six-year period would start from any one year during which the individual has been outside China for a single period of more than 30 days. For example, if the individual has not been outside China for a single period of more than 30 days until the sixth consecutive year, not only should they be subject to the six-year rule exemption for the preceding five years, but also for the subsequent five years.

This is an extension of one year from the previous five-year exemption in the exposure draft of Implementation Rules issued in October 2018. The measure is to encourage expatriates to work in China.

The Implementation Rules also define “ordinary resident” as an individual who has a Chinese domicile, family ties and economic ties in China and because of these ties, has been habitually living in China.

In addition, the Implementation Rules also state that for an individual without residential ties in China in a particular tax year, if their stays in China are in aggregate for 90 days or less; their employment income is paid by an overseas employer; and the compensation would not be charged back to a Chinese entity or a permanent establishment of the foreign employer; then, the compensation would not be subject to China IIT.

China IIT Implementation Rules Table

Obligation to declare the tax status

Based on the above status, expatriates through their bank or through the taxpayer agent must declare his or her individual tax status to the authorities in January 2019 to take into account the computation of the IIT in the IIT system from the tax bureau.

End of tax deductible items for expatriates:

The regulations mentioned that from January 1 until December 2021, expatriates can still enjoy the additional tax-deductible items listed below or choose the specific itemized deductions, but not both.

  • Housing rental
  • Child education
  • Language learning
  • Home traveling
  • Meal and laundry
  • Relocation

Starting from January 1, 2022, the above items can no longer be deductible. Expatriates should follow the specific deduction rules applicable to mainland Chinese taxpayers.

Anti-avoidance rules

The new IIT laws introduce anti-avoidance rules on individuals that empower the tax bureaus to make tax adjustments to combat tax avoidance under the following circumstances:

  • Transfer pricing – transactions between the individual taxpayer and related parties are not independent and not at arm’s length
  • Profits are not allocated properly between the individual taxpayer and a related off-shore corporation that is set up in a low-tax jurisdiction without reasonable and commercial needs, and the corporation is controlled by resident individuals or jointly controlled by resident enterprises
  • Inappropriate tax benefits derived through arrangements without reasonable commercial reason

Under the draft Implementation Rules, the definitions on independent arm’s-length principles, related parties, commercial reasons, control and low tax are predominately consistent with the anti-avoidance rules for corporations. With respect to related parties’ transactions, they added to the definition of related parties to include husband and wife, immediate family, brothers and sisters and anyone maintained or supported by the individual.

Under the final Implementation Rules, the above detailed explanations were removed. Nevertheless, it should be pointed out that the anti-avoidance rules applicable to individuals are now part of the legislation. It is expected that future circulars will be issued in this regard.

TAX AUTHORITY MOBILE APPLICATION

Tax Authority Mobile Application

The tax authorities have launched the mobile app to collect taxpayers’ information. If you are under conditions of the additional itemized deductions, you can declare your authentic information through the website and app and update any change of your information in time.

The mobile app can be downloaded now as shown in the pictures.

Collecting the information can either be done through the mobile app or by the company HR department.

MAZARS’ VIEWS

The new IIT laws and the Implication Rules also enforce the use of anti-avoidance rules related to individuals, even though there had already been few cases previously whereby the Indirect Transfer rule—one of anti-avoidance measures—was imposed on individuals.

In conjunction with the information collected through enhanced information sharing between departments and the automatic exchange of financial assets information under the Common Reporting Standard, it is becoming very clear that there would be tighter rules and greater enforcement of tax obligation in China. For example, the recent high-profile case of the Chinese actress evading tax through the use of two contracts (so-called “yin-yang” contracts) is an indication of the tax authority’s determination to enforce compliance. The Implementation Rules, Circular 41 and PN 60 provide helpful guidance to the application of the new IIT laws. Taxpayers should review their tax arrangements and ensure they understand their compliance obligations. Businesses also should consider the implications of the new rules and the withholding requirements and devise policies that would fit for the purpose of maintaining talents.

HOW CAN BKD & MAZARS HELP YOU?

  • Provide a dedicated payroll system tool for your HR department to help collect the information and manage payroll, if required
  • Assess the possible implications of those changes from short-term and long-term perspectives for your company and yourself
  • Assist your company and yourself in the compliance obligations arising from those changes

CONTACTS

BKD CPAs & Advisors
Toni Rahilly
918.584.2900
trahilly@bkd.com

Mazars
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Hong Kong
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John Poon
Partner
+852 2909.5663
john.poon@mazars.hk

Tax Advisory Services

Beijing
Joey Zhou
Tax Partner
joey.zhou@mazars.cn

Shanghai
Peter Law
Tax Partner
peter.law@mazars.cn

Guangzhou
Emilio Wang
Managing Partner, Guangzhou
jianmin.wang@mazars.cn

Hong Kong
Michael To
Managing Partner
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Anthony Tam
Tax Partner
anthony.tam@mazars.hk

 


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