Businesses operating in China must be aware of the categories of employees that are affected by the IIT reform. This will affect the annual individual income tax reconciliation.
This is the first year where individuals must submit their Annual Individual Income Tax (IIT) based on the new regulations.
What's the reason for the change?
Since China's Individual Income Tax Law revision was passed in August of 2018, there have been many changes that affect both enterprises and individuals.
What does it mean for business?
Businesses may be unsure of the tax calculations, eligibility and tax deductions that are part of the new laws. There are different categories of employees and rules surrounding how they must submit the annual individual income tax reconciliation. Both employers and individuals can be penalised for non-compliance.
When is the deadline?
The deadline for tax reconciliation is June 30.
What types of employees need to submit an annual individual income tax reconciliation?
1. For any employee where there is a gap between monthly pre-paid tax and annual tax settlement.
1.1 Employees that have the Professional Service Fee calculated using the monthly tax rate as withholding and is pre-deducted monthly. Since it is pre-deducted, it must be recalculated using consolidated individual income for the year-end reconciliation.
1.2 If the prepaid/pre-withheld IIT is higher than the IIT liability in 2019 and a resident taxpayer needs to apply for tax refund via Annual Reconciliation.
1.3 If the comprehensive income of 2019 is more than RMB120,000 and the underpaid IIT liability exceeds RMB400.
2. Employees that do not submit Specific Additional Deductions/Donation to authorized charity entities information to their employer, such as their children's personal information for education.
3. Employees that only worked part of the calendar year and only have a partial tax-free threshold. This could be recent graduates, a retiring employee, female employees with maternity leave or an expat employee that came to China mid-year.
4. Employees that work a part-time job where they earn a Professional Service Fee/Author's Remuneration and Royalties outside of their salary or wage from their company.
5. Employees that have already used the Annual Preferential Individual Income Tax Rate for an annual bonus and want to combine it into their Salary and Wage Income.
6. Employees who have changed employers.
7. Employees who have declared a self-paid portion of medical expenses for a serious disease.
8. Expat employees who had planned to stay in China for an entire year or more than 183 days but actually stayed in China for less than 183 days in one year.
9. Expat employees who have renewed their passport and used a new passport number as a tax ID starting in the middle of the year.
10. Employees who were assigned to an overseas project mid-year and do not have tax record in China after their departure.
How we can help?
TMF China can help by providing your business with the latest information about IIT reform, set up orientation sessions for your employees about the annual individual income tax reconciliation and provide support for income tax calculations and applications. We will liaise and communicate with the tax bureau to help with declaration and filing on behalf of individual employees.
Originally published May 14, 2020
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.