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On 30 June 2011, China's National people's Congress
announced some major changes to the collection of individual income
tax (IIT). These will undoubtedly have a large
impact on employees but could also influence the payment practices
of foreign-invested companies in China. The new rules will be
implemented after the summer, on 1 September 2011.
1. The minimum threshold for IIT payments by Chinese employees
has been raised from CNY 2,000 to CNY 3,500.
The minimum threshold was raised from CNY 800 to CNY 1,600 in
2006, then to CNY 2,000 in 2008. The new threshold means that
Chinese employees who earn less than CNY 3,500 (approx. USD 540)
will not pay any IIT, and employees that earn more will see their
taxable income decrease as well. The biggest beneficiaries are
low-income Chinese employees, though their employers who calculate
wages on a net-basis will also see their costs reduced.
Despite suggestions in earlier drafts
of these rules, the minimum threshold for IIT payments by foreign
employees was not altered and remains CNY 4,800.
2. The current 9-bracket progressive tax rate system is
replaced by a 7-bracket system, with the 15% and 40% brackets
removed.
The level of IIT is calculated based on the individuals taxable
income (after deduction of the first CNY 3,500 or CNY 5,800, see
above). The amendment will impact high-income earners, especially
those earn approx. CNY 19,000 or more. Companies that commit to a
net salary in a contract will also be directly effected.
Below we compare the applicable tax rates before and after 1
September 2011:
New Regime (after 1 September
2011)
Old Regime (before 1
September 2011)
Monthly Taxable Income (i.e.
after deductions)
Tax Rate (%)
Monthly Taxable Income (i.e.
after deductions)
Tax Rate (%)
1
Income of CNY 1500 or less
3
1
Income of CNY 500 or less
5
2
That part of income in excess of CNY 1500 to CNY 4,500
10
2
That part of income in excess of CNY
500 to CNY 2,000
10
3
That part of income in excess of CNY 4,500 to CNY 9,000
20
3
That part of income in excess of CNY
2,000 to CNY 5,000
15
4
That part of income in excess of CNY 9,000 to CNY 35,000
25
4
That part of income in excess of CNY
5,000 to CNY 20,000
20
5
That part of income in excess of CNY 35,000 to CNY 50,000
30
5
That part of income in excess of CNY
20,000 to CNY 40,000
25
6
That part of income in excess of CNY 50,000 to CNY 80,000
35
6
That part of income in excess of CNY
40,000 to CNY 60,000
30
7
That part of income in excess of CNY 80,000
45
7
That part of income in excess of CNY
60,000 to CNY 80,000
35
8
That part of income in excess of CNY
80,000 to CNY 100,000
40
9
That part of income in excess of CNY
100,000
45
Comments
Designed to benefit low-income earners
in particular, company's HR departments and pay-roll providers
will have to ensure that the right amount of IIT is paid and
deducted from salaries starting from 1 September 2011. Where
employees – especially senior managers – are
affected, employers should consider whether to provide additional
compensation to cover any loss of actual income. In addition,
companies that determine wages based on a net (after-tax) salary
should ensure they are aware what addition burdens or savings the
new rules will bring.
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.
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The Indian government has, in the recent past, introduced a mandatory requirement of furnishing Tax Residency Certificate, for non-residents seeking tax treaty benefits.
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