Review: China’s New Individual Income Tax: Overview & Implications

Published on 2018-10-23

On 17 October, the Chamber's Financial Services Focus Group invited tax experts from PwC’s Global Mobility Services (GMS) team to lead a session on the overview and implications of China’s New Individual Income Tax law. The event was hosted at ATLAS.

IIT event 

At the event, Miranda Ye, GMS Senior Manager at PwC and Fred Zhang, Tax Manager at PwC, provided a close look and comprehensive interpretation of the amendments to the Individual Income Tax (IIT) law. Highlights of the IIT reform include the following.

1. New aggregate taxation system

The reform introduced 'Comprehensive Income' (income from employment, personal services, manuscripts, and royalties income) which will now be subject to 3-45 percent progressive tax.

Miranda also discussed the potential tax impacts to individuals with different remuneration structures: monthly salaries and wages only; monthly salaries and wages + annual bonus; monthly salaries and wages + equity income.

2. New standard basic deduction and additional deduction items

The standard basic deduction was increased to RMB 5,000 from 1 October, 2018. In addition to this, six new deduction items were introduced, including: dependent education, major illness medical expenses, continued education, mortgage interest, rental expense, and elderly care. Drafted details have been released on 20 October and will become effective on 1 January, 2019. 

3. Assessment and tax position of non-resident 

  • Non-resident: Non-domicile and non-resident in China or, a non-domicile individual who has resided in China for less than 183 (i.e. 182 or lesser) days during the relevant tax year
  • Domicile: an individual who habitually resides in China due to his household registration (or hukou), family, or economic ties.

Non-resident individual should calculate IIT on a monthly or transactional basis.

A foreign individual who resides in China for accumulated 183 days or more in a tax year will be considered as a tax resident of China for that concerned year. If he continues to be "resident" for consecutive five years, he may be subject to China tax on worldwide income starting from 6th year and onwards.

4. Anti-avoidance rule

The new IIT law introduced a general anti-avoidance rule, as well as specific anti-avoidance provisions for related-party transactions and controlled foreign companies. Therefore, the Tax Authority is empowered to adjust tax on a reasonable basis, collects tax underpaid and imposes interest surcharge. This shows the Tax Authorities’ determination to strengthen IIT collection and management, especially against high net worth individuals and their on-/off-shore transactions and structures. 

5. Transformation from governance on withholding agent to natural person 

Under the new IIT law, each taxpayer will have a unique personal TIN (纳税人识别号 ) based on their China ID card. For taxpayer who does not have a China ID card, tax authority will assign a TIN. This TIN will be used for social security, CRS information exchange, immigration, AML, etc.

At the end of the event, Miranda suggested some immediate actions to be taken:

  1. To review the five-year residence status for the foreigners (including expats and local hired foreigners)
  2. To assess and provide recommendations to the company and foreigners on immediate action required
  3. To communicate with the foreigners and address any follow up questions they may have
  4. To assess potential tax cost impacts to the company as a result of the law changes/additional tax burden on foreigners
  5. To communicate with the employees about the new tax filing requirements and deduction items
  6. To explore IT platform to administer the new deduction items under the new law

If you would like to learn more about the event or contact PwC speakers, please email Chamber staff Jun Wang.

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