笨Ben的部落格

A Brief Introduction on the Cumulative Withholding Method

for Individual Income Tax Computation in China

China’s new Individual Income Tax law (“IIT”) law came into effect on January 1, 2019. According to the new IIT law, income from wages and salaries shall be subject to the seven-bracket progressive tax rates and shall be combined on an annual basis for computation of individual income tax. Individual income tax shall be calculated based on the cumulative withholding method, withheld and prepaid on a monthly basis, and annual tax clearance shall be arranged as per the actual income during the period from March 1 to June 30 of the following year.

From January 1, 2019, individual residents can enjoy six special additional deductions, including children's education costs, continuing education costs, critical illness medical expenses, housing mortgage interest or housing rent, and elderly care expenditures, when calculating comprehensive taxable income.

Since the end of year 2018, the tax authorities have made a series of publicity and interpretation for the special additional deduction policy, and most taxpayers have had a certain understanding of the special additional deduction policy and declared and filled the deductions in January. However, the tax authorities have not carried out necessary publicity and popularization on the new cumulative withholding method. In fact, the cumulative withholding calculation method has great impact on the cash flow of both employers and employees.

1.      Definition of Cumulative Withholding Method

Cumulative withholding method is an IIT computation method. As per this method, the withholding agent shall (i) deduct cumulative tax-free income, cumulative expense deductions, cumulative special deductions, cumulative special additional deductions and cumulative other deductions determined by the laws from the cumulative income from wages and salaries paid by the same company as of the current month, recognize the balance as cumulative withholding and prepayment of taxable income; then (ii) calculate cumulative tax to be withheld and prepaid, minus cumulative tax deduction and exemption and cumulative amount of tax withheld and prepaid, and recognize the balance as the tax to be withheld and prepaid for the current period, when withholding and prepaying IIT for taxpayers within one tax year. 

2.      Scope of Application of Cumulative Withholding Method

The withholding agent shall calculate withholding tax based on the cumulative withholding method and withhold IIT on a monthly basis when paying comprehensive income, such as wages and salaries, to individual residents.

The cumulative withholding method is only applicable to the calculation of individual income tax for individual residents who obtain income from wages and salaries. For non-resident individuals who obtain income from wages and salaries, the calculation of individual income tax shall be made on a monthly basis or on a piece-by-piece basis.

3.      Computation Formula of Cumulative Withholding Method

Tax to be withheld and prepaid for the current period = (cumulative withholding and prepayment of taxable income x withholding rate - quick deduction)- cumulative tax deduction and exemption - cumulative amount of tax withheld and prepaid

Cumulative withholding and prepayment of taxable income = cumulative income - cumulative tax-free income - cumulative expense deductions - cumulative special deductions - cumulative special additional deductions - cumulative other deductions determined by the laws

Note 1:    If the tax to be withheld and prepaid for the current period is negative, tax refund shall not be applied for the time being. If the balance is still negative at the end of the tax year, taxpayers can apply for tax refund by arranging annual tax clearance for the annual comprehensive income.

Note 2:    If there is any discrepancy between the annual tax withheld and prepaid and the annual tax payable, the individual residents shall apply with the tax authorities for annual tax clearance during the period from March 1 to June 30 of the following year for tax refund or repayment.

An interpretation of the computation formula:

(1)     Cumulative expense deductions: RMB5,000/month multiplied to the number of months of employment in the tax year as of the current month.

(2)     Cumulative special deductions refer to the accumulated deductable amount of the taxpayer during his/her employment in the company in the current year as of the current month according to the monthly statutory deduction standard. Special deductions include basic pension insurance, basic medical insurance, unemployment insurance and other social insurance premiums, and housing provident fund paid by individual residents in accordance with the scope and standards stipulated by the state.

(3)     Cumulative special additional deductions refer to the accumulated deductable amount of the taxpayer during his/her employment in the company in the current year as of the current month according to the declared deduction standard. Special additional deductions include six items of expenditure, including children's education costs, continuing education costs, critical illness medical expenses, housing mortgage interest or housing rent, and elderly care expenditures.

(4)     Cumulative other deductions determined by the law refer to the accumulated deductable amount of the taxpayer during his/her employment in the company in the current year as of the current month the monthly statutory deduction standard. Other deductions include enterprise annuities and occupational annuities paid by individual residents in accordance with the state regulations, expenditures for purchases of commercial health insurance and tax-deferred commercial pension insurance in accordance with the state regulations, and other deductable items as stipulated by the state council.

(5)     Special deductions, special additional deductions and other deductions determined by the laws shall be limited to the taxable income of individual residents in one tax year. If the deductions cannot be used up in one tax year, it shall not be carried forward to the subsequent years.

(6)     Please refer to the table below for the individual income tax rates applicable to income from wages and salaries:

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