China is calling for public opinion on the proposed draft amendment to the Individual Income Tax Law. Here is our prediction of what the results could be under the Seventh Individual Income Tax law.
It has been seven years since China implemented the last Individual Income Tax (IIT) Law amendment in 2011.
The rapid economic development in China is a major factor to this round of fundamental reform of IIT Law, enabling the country to keep abreast with these developments. This tax reform is also believed to be a policy to stimulate consumer spending.
Companies and multinational corporations in China should be well-informed of the proposed changes to the income tax law so they can prepare themselves to comply with the new requirements.
Amendments to the IIT Law
The new IIT Law will affect both enterprises and individuals by introducing more specific deduction items (expenses related to dependents' education, major diseases, taxpayers' continued education, housing costs and elderly care expenses). Companies need to factor in these expense deductions throughout the process of IIT withholding. Such provisions will pose challenges to an enterprises' withholding obligations.
The draft amendment also revises assessment criteria on the tax residency for IIT purposes. This indicates an overall revision on the current related tax policies, and such changes will have an impact on an enterprise's global mobility policy and costs as well.
The amendment also proposes anti-tax avoidance rules, which will allow the tax authority to investigate potential tax evasion activities based on these rules. With the initiation of the Common Reporting Standard, high net-worth individuals should revisit their cross-border asset arrangements and planning.
As IIT reform can affect both enterprises and individuals, both parties must be well-prepared to comply with the new IIT Law and the relevant implementation details in the future.
To keep up with the tax reform, enterprises in China, should be proactive with these preparations:
- get familiar with the new IIT Law and regulations – keep track of the IIT reform and impact, especially the relevant rules during implementation;
- revisit and analyse – review current procedures and policies in relation to HR and remuneration; to make an assessment on the IIT withholding arrangements and determine the guidance on future developments;
- improve the internal control system – establish a formal procedure and formulate new policies for an internal risk control system; consider other options (such as working with an external partner or technology) to exempt the human resources department from the additional workload caused by the IIT reform;
- IIT planning – plan in advance to reduce the impact of IIT reform on certain groups of employee.
For individuals in China, they can prepare themselves by:
- obtaining tax payment certificate(s) on overseas income;
- mastering the correct IIT calculation formula and relevant IIT treatment;
- ensuring timely completion of the IIT filing and payment before the filing due date;
- collecting and keeping the supporting documents pertaining to the additional specific deduction items (housing cost, education, disease and continuous education);
- revisiting and analysing the current arrangements on foreign investment;
- communicating with consultants on the IIT planning process as early as possible.
Talk to TMF Group
TMF China can help to provide you with the latest information about IIT reform, set up training programmes for your employees on the new IIT reporting policy and administer the expense certification and deductions for employees through the monthly payroll tax processing.
For ultra and high net-worth individuals, we also offer multiple and complex cross-border asset management services, to help you navigate through the global regulatory environment.
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.