What is the new regulation about?
China's top legislature adopted an amendment to the Individual Income Tax Law, raising the minimum threshold for paying personal income tax from 3,500 yuan ($510) to 5,000 yuan per month, or 60,000 yuan per year. The new tax threshold is set to take effect on Oct 1, before the whole amendment comes into force on Jan 1. However, there is a transition period starting from October 2018, which will include some of the new policies, such as the additional income allowance, and some of the current policies, as it will not include the additional deduction categories.
There are three primary changes:
1. Raising the individual tax threshold
2. Consolidation of the income categories
3. Additional new deductible expenses and combining tax bracket categories
The aim of the new amendment of the Individual Income Tax Law is to ease the tax burden for low to middle-income earners while taking a higher standard on higher income earners. Overall the new tax system plans to reduce the tax burden on the middle class and deepen income distribution.
What are the changes?
Tax Residence Rule
The Draft draws from international practice and introduces the concepts of “resident taxpayers” and “non-resident taxpayers” for tax purposes. It also intends to modify China’s personal tax residence rule to a 183-day test from the existing one-year test.
Consolidating Income with Similar Nature for Taxation
The Draft grouped four categories of labor income, including income from salary and wages, income from the provision of independent personal services, income from author’s remuneration, and income from royalties, into the scope of “Comprehensive Income,” and one set of progressive tax rates will apply for determining the IIT. Resident taxpayers will be taxed on an annual basis while non-resident taxpayers will still be taxed on monthly taxable income or as and when taxable income arises.
At the same time, income from a production or business operation conducted by the self-employed will be re-classified as "Income of Operations," and income from contractual or leasing operations to enterprises and institutions will be incorporated into Comprehensive Income or Income from Operations depending on the nature of the income.
Income from operations, interest income, dividends, income from property leasing, income from the transfer of an asset, incidental income, and other income will still be taxed separately at the rate prescribed for that category of income.
Income Tax Brackets
Personal income tax in China ranges from three percent for monthly taxable incomes of RMB 1,500 per month to 45 percent for taxable incomes greater than RMB 80,000 per month. This means that the lower tax rates are now applied on a wider range of income levels, while the higher tax brackets remain the same.
For example, under the old system, an individual with a taxable income (after deductions) of RMB 18,000 per month will be subject to 25 percent of tax resulting in RMB 3,495 levy every month.
18,000 × 25% -1,005 = 3495 yuan
Under the new system, an individual with the same taxable income will be subject to a 20 percent tax rate and will only need to pay:
18,000 × 20% -1,410 = 2190 yuan
Of course, the above formula is based on the monthly taxable income is the same in the new and old system.
*Personal income tax threshold refers to "D - Raising Personal Deduction on Comprehensive Income" below.
*Special tax deduction (allowances) refers to "Allowing Itemised Deductions for Specific Expenditures" below.
Raising Personal Deduction on Comprehensive Income
Personal income tax threshold will be raised up from RMB 3,500 to RMB 5,000 (i.e., RMB 60,000 per year) for Chinese nationals, and RMB 4,800 to RMB 5,000 for foreign individuals.
If introduced, the new personal deduction will apply to all, and the current step-up in the personal deduction (i.e., RMB 1,300 per month) for foreign individuals will no longer apply.
Allowing Itemised Deductions for Specific Expenditures
The special tax deduction is only available for resident taxpayers under the new system. The current deductible items, e.g., basic pension insurance, basic medical insurance, unemployment insurance, and housing fund, the Draft has set up additional deductions for specific expenditures which are closely related to people’s lives, such as expenditures on dependent children’s education, continuing education, serious illness medical treatment, and housing mortgage interest and rentals. In the old system, foreign individuals are entitled to the allowance deductions, the current deductible allowances applicable to non-resident taxpayers are no longer available.
General Anti-avoidance Rule
The general anti-avoidance rules are a feature of many jurisdictions’ tax legislation, and China has already concluded anti-tax avoidance agreements with 103 countries and jurisdictions. Since the implementation of the Common Reporting Standards (CRS), China has concluded bilateral Competent Authority Agreements and activated bilateral exchange relationships with 76 countries and jurisdictions.
Introducing an anti-avoidance rule for individual income tax signals China’s evolving approach towards compliance and utilizing the automatic exchange of financial account information under CRS to increase enforcement of IIT obligations.
Prepare for the change
The amendment also adds special expense deductions for items such as children's education, continuing education, treatment for serious diseases, as well as housing loan interest and rent. This is the first time that such deductions have been introduced to China's individual income tax system.
China’s personal income tax has always been the starting point of 3,500 yuan, and this figure is obviously very low. Because this income is in big cities like Beijing and Shanghai, it can only satisfy the basic living standard. Therefore, the public has long been very dissatisfied with personal income tax.
According to government figures this year, the personal income tax revenue of the Chinese government from January to July 2018 has exceeded the full year of 2015. This shows that under the current economic slowdown, the Chinese government is still strictly levying the personal income tax.
Another figure is that the total consumption of Chinese society has fallen for 12 consecutive months, which shows that Chinese people are increasingly reluctant to spend. On the one hand, high house loan and education expenditure have made people afraid to spend money. On the other hand, personal income tax and social security investment have made people's actual income lower and lower.
The increase in the tax threshold this time is undoubtedly a good news for China's middle class. But people still feel that the threshold of 5,000 yuan is still too low that the government should tax the high-income people, not ordinary people.
The Challenges for HR and Corporates with Change of New IIT:
1. Collection, identification and five deductions of special tax deductions will involve most of the company's employees. If a company with more than 100 people can imagine how much time HR will spend collecting, sorting, confirming, classifying, and keeping these documents;
2. Legal liability and risks have increased significantly. Such as the calculation of deduction and the year-end settlement;
3. The huge amount of work for corporate HR or financial staff to adjust the year-end salary calculation
4. It is necessary to reflect the value of salary management and to reduce and control the labor cost reasonably and legally. This is a test for the current HR;
How Can Talent Spot International Help You?
Reduce costs: Through the refined management of labor costs, reasonable salary optimization, using current domestic tax policies, combined with human resource management ideas, as far as possible to reduce labor costs for enterprises, to maximize benefits
Improve efficiency: The new tax law has high requirements for HR tax knowledge reserve. Talent Spot International's salary outsourcing team has served many large-scale well-known enterprises in various industries and has the professional understanding and practical experience in tax law knowledge. It can be combined with different regions and industries. Different scales of customer service experience make it easier to help HRs in all regions share the workload.
Compliance: With the implementation of the third phase of the Golden Tax, the integration of the five certificates, and the implementation of the new tax law, the data of the enterprise in the human resources management is completely controlled by the regulatory authorities, and “compliance” has become a rigid demand. The Lide International Compensation Outsourcing Team helps the enterprise. Solve the balance of salary, individual tax, social security, and provident fund, help companies standardize operational processes and share potential risks.
Talent Spot International has over 20 years of payroll outsourcing experiences 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.