By Pattie Walsh and Chris Lin
The new requirement
- On 1 July 2011, the Beijing Federation of Trade Unions and the Beijing Tax Bureau jointly issued a circular on the collection of Trade Union Reserve Funds by Tax Authorities (Circular).
- Pursuant to the Circular, the Beijing Tax Bureau will collect the Trade Union Reserve Funds from each enterprise in Beijing at a rate of 2% of the total local payroll (Fund). The collection process is to commence no later than 1 January 2012 and it will be mandatory for each enterprise to pay such Funds regardless of whether or not it has established a trade union.
- In accordance with past announcements from the All-China Federation of Trade Unions (ACFTU), 60% of the Funds will be returned to enterprise trade unions; but no such refund will be made to enterprises with no trade unions. Apparently, this provision is intended to encourage unionisation in foreign invested enterprises (or FIEs), a persistent goal on ACFTU's agenda with support from the central government.
- Such payments are tax deductible if the enterprise has a legitimate and valid invoice for the payment of such Funds.
- Some foreign employers have already received notices from the Beijing Tax Bureau to pay these sums.
- Pursuant to the same Circular, failure to pay the Fund in a timely manner and in full amount will subject the company to a 0.5% late payment penalty and the federation may apply for a payment order and execution order from local courts.
Uncertainties and challenges
- It is unclear what constitutes 'total local payroll' under the Circular, in particular, whether local payroll means only employees whose salary and individual income tax (or IIT) are paid in Beijing or whether it includes those who are based in Beijing but are paid and taxed elsewhere. The issue is most acute for international assignees or expatriates. Senior ACFTU officials in charge of unionisation appear to have varying views on what constitutes "local payroll", the majority view being that if an international assignee / expatriate has worked in China for a long enough duration to be required by Chinese laws to pay PRC tax, then the international assignee / expatriate is considered 'local payroll' and the company should account for the international assignee / expatriate in its payment of the Fund. However, certain local tax bureaus and local federation of unions appear to be open to separate negotiation to waive the requirement to pay the Fund for all international assignee / expatriates.
- If a company is incorporated elsewhere and does not maintain a legal entity in Beijing, will the company still be required to pay the Fund contribution in Beijing? While past announcements from the ACFTU provide that unions should be formed at the legal entity level, the local Beijing Federation of Trade Unions may take the view that a company that has no legal entity in Beijing should pay the Fund to the Beijing Tax Bureau for its Beijing-based employees, even though the company is incorporated elsewhere and already has a union there. The federation may at least request the company to provide a letter from the federation of trade unions in the city of its headquarters certifying that the Beijing-based employees are members of the company's union in that city and the Fund for them is already paid there.
- If the Beijing office receives a notice from the Beijing Federation of Trade Unions or the Beijing Tax Bureau, can it claim exemption by asserting that its headquarters (parent company) already has a trade union? Again, the Beijing Federation of Trade Unions may require a letter from the federation in the city where the company is headquartered, certifying that the company union there has already included the Beijing-based employees as its members and already paid the Fund for them.
The DLA Piper Employment, Pensions & Benefits (EP&B) group is closely monitoring this development and will continue to seek further clarification from our contacts at ACFTU and its Beijing chapter.
Some strategic recommendations
- Use your contacts with the local tax bureau to get a sense of whether, how and when it is going to implement the new rule.
- Ask your HR / Finance teams to pre-assess the financial impact if the company decides to pay the Fund.
- Ask your government relations team to stand by to provide whatever support necessary in seeking support from local government.
- Be strategic and prepare a roadmap to meet the challenges posed by the government's push for unionisation and Fund collection because this is a definite trend. At the moment nearly 85% of leading cities and provinces in China (Beijing, Shanghai and Tianjin are among them) are requiring local tax bureaus to collect the Fund from enterprises.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.