On 31 August 2018, the Standing Committee of the National People’s Congress passed the amendment to reform PRC IIT Law (“the Amendment”). The Amendment was passed by the Presidential Decree No. 9, and will take full effect from 1 January 2019.
The key changes that may affect individuals and/or companies include:
The new law draws from international practice, and introduces the concept of ‘resident’ and ‘non-resident’ for tax purposes. It also modifies China’s personal tax residency rule to a 183-day test from the existing one-year test.
The new law groups the following four categories of labor income within the scope of “Comprehensive Income”:
Under the new laws, one set of progressive tax rates will apply for determining the IIT for this newly consolidated “Comprehensive Income” category. Tax residents will be taxed on an annual basis, while non-residents will still be taxed on a monthly basis or as-and-when taxable income arises.
At the same time, income from production or business operations conducted by self-employed persons will be reclassified as “Income from Operations”. Meanwhile, income from contractual or leasing operations to enterprises and institutions will be reclassified as “Comprehensive Income” or “Income from Operations” depending on the nature of income.
Income from operations, interest income, dividends, property leasing, transfer of assets, incidental income and other income will still be taxed separately at the rate prescribed for that category of income.
Tax rates on Comprehensive Income:
Tax rates on Income from Operations
The new law raised the personal deduction amount for Comprehensive Income to RMB 5,000 per month (i.e. RMB 60,000 per year). The new personal deduction applies to all, and the current step-up in personal deduction (i.e. RMB1,300 per month) for foreign nationals will no longer apply.
In addition to the current deductible items (e.g. basic pension insurance, basic medical insurance, unemployment insurance and housing fund), the new law has set up additional deductions for specific expenditures which are closely related to people’s lives. This includes expenditures on dependent children’s education, continuing education, serious illness medical treatment, housing mortgage interest and rental and elderly care expenses.
The new law indicates that “one taxpayer, one number” is the basis for developing a modern IIT collection and administration system. It also makes reference to the general anti-avoidance rules under the PRC Corporate Income Tax Law, and introduced similar rules to empower the tax authorities to assess tax on individuals who are involved in transactions such as:
Where tax is assessed, any late payment surcharge would also be collected accordingly.
Phase 1, effective from 1 October 2018, the new tax table was implemented for:
Phase 2, the overall amendment will be effective from 1 January, 2019.
The revised IIT law brings significant challenges to expatriates in China with global incomes as well as Human Resources and Finance departments who manage the change. There are still some items, such as those below, which are expected to be clarified in the near future.
From the expanded taxation scope of foreign individuals to the increasing compliance risks impacting enterprises, both employers and employees should prepare for challenges brought about by the new IIT Law, and pay close attention to the upcoming new Implementation Rule and revisions to other tax regulations.
The table below highlights the main changes to the taxable income brackets, especially for those taxpayers subject to an applicable tax rate of 25% or lower under the current IIT law.