An Introduction to the Amendments of Individual Income Tax Law of the People's Republic of China

Part A

Individual Income Tax Law of the People’s Republic of China & Regulations for the Implementation of Individual Income Tax Law of the People’s Republic of China
(2005)

The Standing Committee of the National People’s Congress passed the 3rd amendments of Individual Income Tax Law of the People’s Republic of China on the 27th of October, 2005 and the amendments came into effect on the 1st of January, 2006.

AMENDDMENTS:

1. Article 6
For income from wages and salaries, a monthly deduction of 1600 yuan shall be allowed for expenses and that part in excess of 1600 yuan shall be the taxable income．

From 1st of January 2006, income from wages and salaries shall be taxed at progressive rates ranging from 5% to 45% after a monthly deduction of 1600 yuan plus a monthly expense deduction of 3200 yuan.

Example:
Mr Tailor, a foreign individual earned 10000 yuan as his salary in January 2006. The following tells how much he must pay for his individual income tax on income from his salary for the month in accordance with the provisions of the individual income tax laws in China:
[10000 – (1600 + 3200)] x 20% - 375 = 665（yuan）

2. Article 8
For individual income tax, the income earner shall be the taxpayer and the payer shall be the withholding agent. Taxpayers that receive wages or salaries (1) more than that of regulated by the State Council, or from two or more payers, or without withholding agents, or (2) other circumstances regulated by the State Council shall (3) file their own tax returns and pay taxes by themselves. (4) Withholding agents shall file complete information of all their payees with income for individual income tax in accordance with state regulations

(1) More than that of regulated by the State Council:
Taxpayers have annual income over 120,000 yuan (including the 11 categories of income in Article 2 of the Individual Income Tax Law)

(2) Other circumstances regulated by the State Council:
a)Taxpayers have income from wages or salaries from two or more payers within China;
b)Taxpayers have income from outside China;
c)axpayers have income but without withholding agents

(3) File their own tax returns and pay taxes by themselves
Taxpayers shall file their own tax returns and pay taxes by themselves within 3 months of the following year.
(Article 36 of Regulations for the Implementation of Individual Income Tax Law of the People’s Republic of China)

(4) Withholding agents shall file complete information of all their payees with income for individual income tax in accordance with state regulationsWithholding agents shall file complete information of all their payees to the tax authorities within the following month when taxes are withheld. The information shall include the basic information of individual taxpayers, payments made to them, tax withheld specifically and totally and other information related to tax handling.

(Article 37 of Regulations for the Implementation of Individual Income Tax Law of the People’s Republic of China)

Note: Due to the current situation, only a few withholding agents are selected to do the complete filing for test.

Part B

Income from Annual Bonus

1. For the income from annual bonus, it can be broken into several payments provided they are paid within one month.

Example:
Mr. Smith got his salary of 10000 yuan plus an annual bonus of 48000 yuan on Jan 5, 2006, an annual extra salary of 10000 yuan on Jan 15, 2006 and a performance bonus of 5000 yuan on Jan 25, 2006. According to the regulations in SAT Notice No.9, 2005, his tax payable on salary and annual bonus is calculated as follows:
Formula for his monthly salary:
tax payable for salary=(salary-monthly deduction)×tax rate - quick deduction
=(10000 – 4800)×20% - 375
= 665 (yuan)
Formula for his annual bonus:
tax payable for bonus=bonus×applicable tax rate of (bonus÷12)-applicable quick deduction
　　=(48000＋10000＋5000)×20% - 375
　　= 12225 (yuan)
　　total tax payable＝665﹢12225
　　＝12890(yuan)

2.For those employed in enterprises established for less than one year or newly employed for less than one year, their bonus can still be divided by 12 while determining the applicable tax rate for bonus.

Example:
Mr. Clinton was employed as a technician in Cannon Shenzhen in July 2005. He received his salary for 35000 yuan plus an annual bonus of 45000 yuan on the 26th of Jan 2006. Here is the individual income tax he had to pay for his income:
Formula for his monthly salary:
tax payable for salary=(salary-monthly deduction)×tax rate - quick deduction
　　=(35000 – 4800)×25% -1375
　　= 6175(yuan)
　　Formula for his annual bonus:
　　tax payable for bonus=bonus×applicable tax rate of (bonus÷12)-applicable quick deduction
　　=45000×15% - 125
　　= 6625(yuan)
　　total tax payable＝6175﹢6625
　　＝12800(yuan)