China: Reform to social insurance system to impact foreign businesses in China

Last Updated: 3 September 2018
Article by Maarten Roos and Simon Robertson

With the Regulations on the Reform of National Tax and Local Tax (the "Reform") adopted on 20 July 2018 (to become effective on 1 January 2019), the responsibility to collect social insurance premiums (i.e. for basic pension insurance, basic medical insurance, unemployment insurance, work-related injury insurance, and maternity insurance) will be transferred from the local social insurance bureau to the local tax bureau. This means that from 2019 onwards, the same bureau will be in charge of the collection of both individual income tax and social insurance premiums.

This could have huge implications on companies in China, as the local tax bureau will have direct information on whether:

  • Social insurance premiums are being contributed on the full salary of employees.
  • Social insurance premiums are being contributed in the location where the employer is established.
  1. Under-Reporting of Social Insurance

The law (via the Circular on Relevant Matters concerning the Standardization of the Social Insurance Contribution Base [2006]) establishes very clearly that social insurance should be declared and withheld by the employer and paid on the full monthly salary of the employee. The only exceptions are:

  • If the monthly salary is higher than three times the average salary in such location, then this "cap" will be used as basis to calculate and pay premiums.
  • The social insurance basis is normally adjusted once per year. Therefore an increase of wages will not immediately lead to an increase in social insurance obligations; instead adjustments should be made around February every year (referring to the average monthly salary in the previous calendar year).

Under current practice, social insurance bases are reported to and premiums are collected by the local social insurance bureau, which does not have direct access to information on an employee's actual salary; while the local tax bureau has the employee's salary (to calculate individual income tax) but is not involved in social insurance premium collection. As these authorities have separate systems and generally do not share information, some companies get away with under-contribution of social insurance premiums.

The main objective of the Reform is to put an end to this practice. Once local tax bureaus combine the two information systems into one, any incongruences will be found out immediately. Penalties for non-compliance remain unchanged, and include late fees (0.05% per day) and a penalty of up to three times the outstanding amount.

  1. Location of Social Insurance Declaration

The Administrative Provisions on Declaration and Payment of Social Insurance Premiums [2013] (Article 4) provide that social insurance premiums should be paid in the location where the company is located. In practice however, it is very common for a company to hire people directly in other locations. Some examples of common situations:

  • A retailer who is selling in another city through a join-sales agreement with a department store (so no branch is needed), and is using its own staff to operate the consignment store in the name of the landlord;
  • A manufacturer has sales people in locations all over China to reach customers, but manages these people from HQ.
  • A sourcing company hires local quality control people to manage production processes at various factory locations.

In all the above examples, the employee will want to benefit from social insurance premiums paid in the location where he/she works, but the employer is registered at a different location and prefers to avoid the set-up of a separate registered branch office in each location that it has staff. The normal way around the above restrictions is to hire a national-level, certified human resources agency (i.e. a staffing firm) such as FESCO or CIIC to assist: the employment relationship remains with the company and so individual income taxes are withheld and paid at the location where the company is registered; while the agency assists to pay social insurance premiums in the other location under a separate service agreement.

While we cannot stress enough how common this practice is, it is technically incompliant. And when the collection systems for IIT and social insurance premiums are combined, then any inconsistency will immediately become clear to the tax authorities.

The Reform does not seem to be primarily targeted at this practice, and it would be a huge effort on the part of tax bureaus to force companies to change their practices. It is also a main part of the business of State-owned staffing firms such as FESCO and CIIC which would lose much of their relevance if the practice is disallowed. At the same time, unless the current practice is somehow legalized, there remains a risk that a tax bureau will start addressing this issue sooner or later – for example by refusing payment of social insurance premiums if no IIT has been paid in the same location, or pursuing companies that try.

If a tax bureau raises concerns, and for companies that want to get ahead of the issue, we see the following options:

  1. Pay social insurance premiums in the location where the company is located, even if the employee is based elsewhere and cannot then fully benefit from the social insurance system. This would increase the challenge of competing for the best talent.
  2. Establish a branch in every city where fulltime employees are located, so that social insurance premiums and salary can be paid by the branch. This would significantly increase an employer's administration and costs.
  3. Have a staffing firm hire the employee directly and dispatch her to the company. However dispatch services are only permitted for temporary, auxiliary and alternative positions, and should represent no more than 10% of the total work service. Moreover, dispatch will reduce control over the employment relationship, and can increase costs.

Conclusions

Companies should review their practices to ensure that social insurance premiums are based on the full salary of their employees. While the risk of incompliances being discovered has been relatively low in the past, it will become very high starting 1 January 2019 and with high penalties, it is important to get ahead of the problem as soon as possible.

As regards the practice of paying social insurance premiums in a different location from where the employee is established, it remains to be seen how big this risk will be. Companies have a number of alternative approaches but none are ideal. Companies that wish to minimize risk should consider acting now; in any case, an affected business should be ready to take action immediately if its local tax bureau raises the issue.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Maarten Roos
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions