笨Ben的部落格

Major Proposed Changes to the China Individual Income Law 2018

A draft law (seventh draft amendments to the PRC individual income tax (IIT) law) containing broad changes to China’s IIT system was submitted to the Standing Committee of the National People’s Congress for deliberation on 19 June 2018, and released to the public for consultation on 29 June 2018. This is the seventh amendment to the IIT Law and is considered to be the most important once as it includes fundamental changes to the definition of a resident and the consolidation of various categories of income.

China's current IIT law groups personal income into 11 categories. Each income category has its own tax rate(s) and allowable deduction. For example, the amount of allowable deduction for employment income (i.e. wages and salaries) is RMB3,500 per month; labor service income, author’s remuneration and royalty income, a deduction of CNY 800 or 20% of the income is allowed when determining the taxable income.

The draft law grouped four categories of labor income, including income from salary and wages, income from provision of independent personal services, income from author’s remuneration and income from royalties, into the scope of “Comprehensive Income”, and one set of progressive tax rates will apply for determining the IIT. Tax residents will be taxed on an annual basis while non-residents will still be taxed on a monthly or as and when taxable income arises.

The draft law also widens the tax brackets with applicable tax rate of 3%, 10%, and 20%; narrowing the 25% tax bracket, and meanwhile maintaining the tax brackets for three higher levels at 30%, 35% and 45% unchanged.

The draft law is expected to become effective on 1 January 2019. However, the increased standard deduction would be effective as early as 1 October 2018. During the period from 1 October 2018 to 31 December 2018, salaries and wages will first be deducted by RMB5,000 to arrive at the net taxable income and apply the rates listed in Table 1 in Section 3 to arrive at tax payable amount.  

1.    Definition of resident

Under the current IIT Law, a non-China-domiciled individual will be considered a Chinese tax resident only if he/she stays in China for a full tax year—i.e. 365 days in the calendar year, with temporary trip(s) (i.e. one single trip of more than 30 days or multiple trips of more than 90 days) outside China not taken into account. The following table sets out how the new rules would operate:

The draft law introduces the concept of resident and non-resident for tax purposes. It also intends to modify China’s personal tax residence rule to a 183-day test from the existing one-year test.

In accordance with the draft law, an individual without domicile in China who has spent 183 days or more in China during the relevant tax year would be considered a ‘China resident’ for IIT purposes, and will be subject to China individual income her/his income sourced both within and outside of China. An individual without domicile in China who has spent less than 183 days in China during the relevant tax year would be considered a ‘non-China resident’ for IIT purposes, and would only be subject to China individual income tax on her/his income sourced within China.

2.    Tax categories

The existing IIT law uses a typical schedular system, according to which all taxable income is classified into 11 categories and the income under the different categories is taxed separately. The draft would consolidate four categories of income (i.e. salaries and wages, remuneration for (independent) services, authors' remuneration and income from royalties) into a single new tax category called “comprehensive income.”

The draft law also simplifies other remaining categories. For example, Income derived from production and business operations by individual industrial and commercial households is reclassified as business operation income; the category of income derived from contractual or leasing operations of enterprises or institutions is removed with relevant income incorporated into comprehensive income or business operation income respectively.

3.    Tax rates and brackets

Salaries and wages currently are subject to progressive tax rates ranging from 3% to 45%, with seven tax brackets. According to the draft, the tax rates and brackets would be applied to compute tax on comprehensive income. The lowest three brackets (i.e. 3%, 10% and 20%) would be broadened considerably to benefit middle-/low-wage earners.

Table 1 – Tax Rates (Comprehensive Income)

4.    Standard deductions

Under the current IIT Law, the amount of allowable deduction for employment income (i.e. wages and salaries) is RMB3,500 per month; labor service income, author’s remuneration and royalty income, a deduction of RMB800 or 20% of the income is allowed when determining the taxable income.

According to the draft law, the basic standard deduction that currently applies to salaries and wages also would apply to comprehensive income and would be increased from RMB3,500 per month to RMB5,000 per month (i.e. RMB60,000 per year). However, the draft would repeal the additional standard deduction of RMB1,300 per month that currently applies to salaries and wages earned by foreign individuals working in China and China-domiciled individuals working overseas.

5.    Additional itemized deductions

The existing IIT law provides for few itemized deductions, and those that are available normally are limited to statutory social security contributions. To promote the well-being of the population and reduce the cost of living, the draft would introduce additional itemized deductions, including deductions for children’s education and continuing education expenses, medical expenses for critical illnesses, housing mortgage interest, and housing rent.

6.    Tax assessment, collection and filing

The draft law introduces new rules relating to tax compliance obligations.

For Chinese citizens having identification, such identification would be their tax ID; while, for those not having identification, tax authorities would assign a tax ID.

Comprehensive income derived by resident individuals would be assessed on an annual basis (currently, all individuals earning salaries and wages are assessed monthly). However, comprehensive income derived by non-residents would be assessed on a monthly or transactional basis.

The IIT for resident individuals would be collected through advance tax payments withheld and remitted by the payer (if any) on a monthly or transactional basis, with a final settlement made by the taxpayer at the time the annual return is filed. The annual return must be filed between 1 March and 30 June of the year following the calendar year.

The draft law also provides that if a taxpayer submits information relating to itemized deductions to an income payer (i.e., the tax withholding agent) and requests the payer to deduct the relevant items to compute the advance tax payments to be withheld, the payer would not be able to refuse the request.

For non-residents, an income payer could act as a withholding agent to withhold and remit the IIT on a monthly basis on behalf of the taxpayer by the 15th of the following month, and annual return would normally not be required.

7.    Tax clearance upon immigration

Based on the draft law, if a taxpayer plans to deregister his/her Chinese Hukou (household registration in China) to immigrate abroad, the taxpayer would be required to settle his or her Chinese IIT liabilities before the deregistration would be allowed.

8.    Anti-avoidance rules

The draft law would introduce anti-avoidance rules (similar to those that apply for enterprise income tax purposes), and would allow the Chinese tax authorities to initiate tax adjustments and collect underpaid tax with overdue interest in the following situations:

(1)     When transactions between an individual and his/her related parties do not comply with the arm’s length principle and the noncompliance cannot be justified;

(2)     When a resident individual controls (or jointly controls with other resident individuals/companies) an enterprise established in a jurisdiction where the effective tax rate is significantly low and the enterprise does not distribute profits or distributes less profits than it should without a reasonable business justification; and

(3)     When an individual obtains improper tax benefits through an arrangement that lacks a reasonable business purpose.

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