Top 10 Questions for 2018 China's New Individual Income Tax That HR Cares About Most

In the previous article, we posted the "New Regulations about China's Individual Income Law." This is big news for HR in China because the new changes and rules can impact the company in many ways. Below are what companies, multinational corporations, and HRs in China should know about the proposed changes to the income tax law.

Q1. What are the objectives of the reform of the “IIT Law of the People’s Republic of China” (the “IIT Law”)?

1. 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.

2. 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.

3. 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?

1. The new definition of individual residency criteria in determining the non-resident status

2. Adjustment of the IIT categories and lower tax brackets

3. Increase the number of standard deductions

4. Introduction of specific additional deductions

5. The combination of an aggregation and scheduled taxation system

6. The process for individual income tax clearance before immigration

7. Rebalancing the obligations and liabilities across government authorities & collection of data to support the credit information system

8. 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 deepen 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 Itemized Deductions for Specific Expenditures”?

According to the Amendments, additional itemized 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 deductions,s and other deductions recognized under the law. This means, that starting from 1st 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. Do tax exemption benefits for foreigners still exist?

Current tax law allows foreigners to apply and enjoy tax exemption allowances, for instance, allowances for housing, meals, laundry, relocation, family visits, language training, and children's 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, a 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 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 IIT 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 another amendment of the new IIT Law will be 1 January 2019.

Q9. Is there any requirement for filing RMB 120,000 annual income in the future?

Although the Amendments do not mention any specific procedure regarding 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?

1. In terms of system implementation, the collection of credit information data is one of the highlights of this tax reform, we expect corporations that have withholding tax obligations will have to undertake the responsibility of collecting taxpayers’ information.

2. 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.

Talent Spot International has over 20 years of payroll outsourcing experience in China. We concentrate on HR laws and regulations to ensure the payroll services we provide are accurate. Talent Spot payroll outsourcing means faster and easier solutions to improve and drive your comprehensive HR management to the next level.