Proposed changes to Chinese income tax laws have a significant impact on both foreign and local employees
A draft amendment on the PRC Individual Income Tax (“IIT”) Law has been released recently for public consultation. The main proposed changes include the followings:-
- To introduce the determination criteria of a “tax residency” in China (i.e. expatriates staying in China for 183 days or more in a tax year would be regarded as a “China Tax Resident”). As a result, there is a possibility that these expatriates’ worldwide income may be subject to IIT during their first year in China.
- To combine certain income items under a new income category namely “comprehensive income” for tax purposes
- To revise the “income brackets” for those from 3% to 25% under the progression tax rates system
- To increase the “monthly statutory deduction” amount
- To introduce a number of “itemized tax-deductible items”
- To introduce a new “tax clearance” requirement on those PRC nationals who wish to de-register their PRC household registrations
- To enhance information sharing among various Government authorities, financial institutions, Social Security Bureaux, etc.
- To introduce the IIT “anti-tax avoidance rulings”
The proposed changes under this draft amendment, if passed, will have a significant impact on both local and foreign employees’ tax implications in China.
What action is required?
The new tax rules raise both compliance and tax planning risks.
Employers should ensure that they understand the potential changes on both tax calculations and tax administration and withholding requirements. The proposed changes will affect employers’ daily operations on the IIT withholding matters in future.
For the expatriate employees, consideration should be given to performing a review of their PRC income tax status. In particular, their tax resident status; whether their existing tax planning arrangements will remain valid; and, what any additional tax impacts may be under the new proposed IIT Law.
For both foreign nationals and local employees employed in PRC both employers and employees should be aware of the new proposed “itemized tax-deductible items”. In future, their overall tax liabilities may be significantly reduced by making use of these “itemized tax-deductible items”.