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.
It has been seven years since China implemented the last Individual Income Tax (IIT) Law amendment in 2011. Below are what companies and multinational corporations in China should know about the proposed changes to the income tax law.
Q1. What are the objectives of the reform of "IIT Law of the People's Republic of China" (the "IIT Law")?
- The amendment is aimed at creating fairness by introducing variable tax rates implemented across different income bands, increasing the standard basic deduction and adding specific deduction items.
- A new definition of tax residency, moving away from local earnings-based income tax to a brand new global aggregation taxation system, making it consistent with international practice.
- Several other changes include a new requirement for individual income tax clearance before immigration, rebalancing of the obligations and liabilities across government authorities, a commitment to build a national credit information system and the introduction of anti-tax avoidance rules.
Q2. What are the key areas for attention and consideration?
- The new definition of individual residency criteria in determining non-resident status
- Adjustment of the IIT categories and lower tax brackets
- Increase the amount of standard deductions
- Introduction of specific additional deductions
- The combination of an aggregation and scheduled taxation system
- The process for individual income tax clearance before immigration
- Rebalancing the obligations and liabilities across government authorities & collection of data to support the credit information system
- Introduction of anti-tax avoidance rules
Q3. Who will benefit from the IIT reform?
The IIT reform is intended to reduce the tax burden of the working class and deepens the reform of the income distribution system by raising the IIT threshold, aggregating income in tax bands and introducing additional special deductible expenses.
Q4. What is included in "Additional Itemised Deductions for Specific Expenditures"?
According to the Amendments, additional itemised deductions include:
- education expenses for children;
- expenses for further self-education;
- healthcare costs for serious illness;
- housing loan interest and housing rental and;
- elderly care expenses.
The State Council will determine specific areas, standards and implementation steps, and file with the Standing Committee of the National People's Congress for record purposes.
Q5. What has changed to the minimum threshold for personal income tax?
Under the Amendments, the comprehensive income of individual residents shall be the taxable income after deducting expenses, the first RMB 60,000 from the income of each tax year, special deductions, special additional deduction and other deductions recognised under the law. This means, starting from 1 October 2018, the minimum threshold for personal income tax will be increased to RMB 5,000 per month from the current RMB 3,500 per month.
Q6. Does tax exemption benefit for foreigner still exist?
Current tax law allows foreigners to apply and enjoy tax exemption allowance, for instance, allowances for housing, meals, laundry, relocation, family visits, language training and children education expenses. However, this is not mentioned in the Amendments. Therefore, it is uncertain as to whether these tax exemption benefits will still exist or go through any adjustment. We will monitor the new tax law and implementation of the amended regulations to keep track of this topic.
Q7. Under certain conditions, foreign individual's decision to pay tax to the China government depends on whether they have lived in China for more than 5 years. Will this rule change after the new IIT reform?
Under the new IIT law, any individual who has a domicile within the territory of China or who has no domicile but has stayed within the territory of China for an aggregate of 183 days or longer in a single tax year is considered as a resident individual.
A resident individual shall pay individual income tax for any income sourced within and outside the territory of China according to the provision of this Law.
Q8. When will the new income tax law take effect?
From 1 October 2018 until 31 December 2018, individuals in the working class can firstly benefit from the monthly revised exemption up to RMB 5,000 and the other specific deductions as well as allowances under the law. The effective date of other amendment of the new IIT Law will be 1 January 2019.
Q9. Is there any requirement for filing RMB 120,000 annual income every year end in the future?
Although the Amendments do not mention any specific procedure regarding to the RMB 120,000 income filing, the government has introduced a comprehensive income tax return system. In addition to the deduction of the withholding tax (monthly or another form of regular basis), taxpayers are required to settle the tax payment between 1 March and 30 June of the following year after the occurrence of the income. As a result, annual settlement becomes the most important stage in the tax filing process.
Q10. For an executive from the human resources or finance department, how will the tax reform affect their daily work?
- In terms of system implementation, the collection of credit information data is one of the highlights from this tax reform, we expect corporations that have withholding tax obligations will have to undertake the responsibility of collecting taxpayers' information.
- Upon the announcement of the implementation details, taxpayers must collect all domestic as well as overseas income tax payment related documents, and any evidence relating to deductions within a timeframe. On top of that, they must create, revise and match internal processes and systems, which cover receipt collection, verification and storage related work.
Talk To TMF Group
Understanding the IIT law post reform can be confusing and time-consuming. If you need help to sort out the new law and its impact on your business, reach out to us.
TMF Group has a team of experts that can provide you insights and guidance to navigate through this transition period, so your business can continue to operate smoothly.
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.