Are you ready for 2020 Annual IIT Settlement?

Published on 2021-03-01

The newly revised Individual Income Tax (IIT) Law came into effect from January 1, 2019. The new IIT Law introduced the concept of tax resident and non-resident, comprehensive income and six special additional deductions, etc.

Moreover, the IIT filing method has changed from withholding and prepaying by withholding agent to the combination of withholding and prepaying by withholding agent and self-declaration by taxpayers. The resident individual needs to file the annual IIT return from March 1 to June 30 of the following year. It was the first time to conduct the annual IIT reconciliation filing in China last year for the comprehensive income of 2019. The annual IIT reconciliation filing for 2020 will be carried out soon from March this year, and it is required to fill in the form for IIT reductions and exemptions as well as other attached forms starting from 2020 reconciliation filing. The IIT reconciliation filing, which has only been operated for one year, is challenging. The Taxation Bureau introduced many new policies in 2020 due to the sudden outbreak of COVID-19, together with the new requirements of filling in the IIT reductions and exemptions form and other attached forms, which made the annual IIT filing in 2020 more complicated. What are the “traps” in the final settlement of IIT, especially for foreign individuals? How to prepare for the final settlement of IIT in 2020?

I. Declaration form for the annual tax return

The declaration form for the annual tax return consists of a main form and a series of attached forms. Under the new IIT law, 2019 is the first year for which an annual IIT reconciliation filing is required for comprehensive income, and only one main form was required to be filled in when handling the final settlement of IIT in 2019. However, from 2020, it is required to fill in the report form of IIT reductions and exemptions and other attached forms. The IIT reconciliation of comprehensive income involves a number of preferential taxation items, including wages and salaries of ocean-going crew, temporary subsidies or bonuses granted by the state for COVID-19 prevention and control, social insurance premium and housing fund, commercial health insurance, public welfare donation, eight items of non-taxable allowances for foreign individuals, as well as preferential treatment for disabled, elderly and martyr's family. How to fill in these items in the report form of IIT reductions and exemptions and the skills of filling in need to be prepared by the taxpayer in advance.

In addition, Chinese people can directly fill in the forms related to special additional deductions through IIT return APP, but some foreign individuals may not have APP or do not understand Chinese, so they can only manually declare to the taxation bureau. However, the taxation bureau may not recommend manual declaration because of the cumbersome procedures, therefore the declaration of special additional deductions for foreign individuals is recommended to be arranged as early as possible. In particular, if a foreign individual who is deemed as a China resident taxpayer while does not enjoy the eight items of non-taxable allowances, the foreign individual should review whether he or she meets the conditions of special additional deductions and declare accordingly to maximize the tax preference.

II. Combination of tax records under the update tax ID number

A foreign individual may have income paid by multiple employers, but not all the information of the tax paid for these incomes are shown in the APP. The main reasons for this are as follows:

  1. 1)  The same foreign individual has multiple tax declaration records with different names under the same passport number, which is caused by wrong inputs of the name by the company when declaring tax, such as missed letters, extra spaces, extra commas, etc. Any inconsistency will lead to this situation;

  2. 2)  A foreign individual renewed passport during the year and got a new passport number accordingly. The new passport number generates different tax return and multiple tax declaration records.

In case of the above situations, the company needs to communicate with the taxation bureau in advance and complete the combination of tax records under the update tax ID number before annual IIT filing, otherwise you may fail to handle annual IIT returns. Since it takes some time to update the taxpayer information and combine tax records, combination of tax records in advance is prerequisite for completing annual IIT filing on time.

III. Bank card cannot be added in IIT return APP for tax refund

When the company declares IIT by withholding and prepaying, the name on the passport of a foreign individual must be consistent with the account name of his or her bank card. Extra spaces or missed letters are not allowed. Therefore, if the name on the passport does not match the bank account name, it is necessary to submit an amendment application to the taxation bureau as soon as possible to make the names consistent, otherwise the tax refund is not guaranteed.

IV. Differences in tax officials' understanding of policies

As last year was the first time for annual IIT final settlement, the differences of tax officials' understanding of policies or the internal process and arrangement may lead to not quite efficient communication between departments, which may lead to the rejection of tax refund application. In this regard, we suggest the taxpayer to get familiar with the policies on IIT before annual IIT filing and communicate with the taxation bureau with their understanding of the policies when the tax refund application is rejected, so as to complete tax refund successfully. If the taxpayer encounters complicated cases, he or she can seek the assistance of professionals or agencies. When handling the annual IIT filling for an foreign individual for 2019, based on our understanding of tax policies and specialized experience, Tricor communicated with the tax bureau for more than five times, and finally succeeded in tax refund in the case that the tax refund applications were rejected for many times.

V. Pre-judgement of identity of tax resident or non-resident

When a foreign individual makes his or her first declaration every year, he or she shall estimate the number of days living in China in a calendar year and according to the number of days staying in China within the period specified in the tax treaty to calculate the tax accordingly to complete the monthly IIT filing and tax payment. Therefore, understanding whether a foreign individual is deemed as a China resident taxpayer at the beginning of each year is closely related to the number of days staying in China. The status may change from the pre-judged non-resident taxpayer to resident taxpayer. There is no item to recalculate the annual bonus and stock-based income on annual IIT return if a non-resident taxpayer becomes a resident taxpayer, it is necessary for the company to communicate with the tax bureau to decide whether to adopt the monthly tax correction declaration or submit the tax filing separately.

Similarly, a foreign individual may also change from the resident taxpayer at the beginning of the year to non-resident taxpayer. In this case, the declaration time, which is between January 1 and January 15 of the following year, is different from the time of annual IIT settlement. In this case, the procedure is different whether employer declares on behalf of the foreign individual or the foreign individual self-declares to the taxation bureau. It is suggested to communicate with the tax bureau in advance to choose the easier way to declare.

After the tax reform, the logic of IIT calculation is more complicated, which is classified into the calculation of residents' tax according to cumulative income and the calculation of non-resident’s tax based on monthly income; remuneration of service and wages/salaries are taxed separately at the stage of withholding and prepaying, but need to be consolidated and taxed based on the comprehensive income when handling the annual IIT reconciliation filing. With the tax law system well established now, more stringent control on the tax supervision. The IIT declaration system is more optimized and intelligent than before, which make the taxation bureau has more guarantees on data sources for data comparison and supervision by using big data. At the same time, with the introduction of the automatic exchange mechanism of financial information in tax matters, Chinese taxpayers, especially those who have assets abroad, shall pay more attention to tax compliance. After the tax reform, higher requirements have been put forward for both enterprises and individuals in terms of tax declaration compliance.

Contact us:

  • Susan Peng
  • Associate Director, HR & Payroll