|
Several Issues related to Individual Income Taxes for Expatriates
Expatriates on extended business trips to China
If you are sent by your organization to China and your salary
is paid off-shore (probably in your home country) and you
spend more than 183 days in China in a calendar year, than
you have to pay IIT in China based on the days you effectively
spend in the country. This means that if you spend in China,
let's say, 184 days within a calendar year, than you would
have to pay taxes on all income sourced from China (meaning
income related to your work performed in China).
Foreigners working for legal enterprises in China
Without going into too many complicated calculations and theories,
if you hold positions such as the Chief Representative (CR)
of a Representative Office (RO) or the General Manager of
a Chinese Limited Company, Wholly Foreign Owned Enterprise
or a Joint Venture anywhere in China, then you are subject
to IIT from the first day you commence work in the country.
Interestingly, should you not actually visit China within
a calendar year but are still acting as the Chief Representative
of a Representative Office, then zero tax filings should still
be made monthly to the local authorities.
According to the law you should declare the full salary for
the position and pay IIT accordingly. In practice, however,
it is common to see foreigners declaring an "arranged"
fixed salary for their China position (with the rest being
paid off-shore) and pay taxes accordingly, lowering to a great
extent their full tax liability. This practice is illegal
so be careful should you decide to pursue this route. While
this has been common practice in the past, it also puts the
employer out of compliance — fines of several million
RMB have been levied just recently to FIE's engaged in such
practices in China — and the risk of being caught —
with the issue now highlighted at audit — is increasing.
Foreigners holding concurrent posts both in China and elsewhere.
Firstly, you should be arriving in China on a business visa,
and are subject to IIT based on the number of physical days
you are in China. This is assessed upon the total salary you
are claiming from your local employment position and from
the parent company overseas — the Chinese tax bureau
may want to see proof of earnings from your parent (tax slip,
payment voucher etc) to support your case. At the end of each
month, your China office should take copies of your passport,
together with the entry/exit stamps for that month, and file
and pay for taxes based upon the number of days spent in the
PRC. The tax bureau will issue a receipt showing this has
been paid, this can be credited against the tax paid in your
resident location (ie: you won't have to pay tax both in China
and your resident location for the time spent in China).
China residency status and IIT on your worldwide income
Be aware that if you are regarded as tax resident by the Chinese
government, which means you have stayed in China for more
than 5 years (without residing outside the PRC for more than
90 days cumulatively each calendar year or 30 consecutive
days always within a calendar year), you have to pay IIT on
your worldwide income without limitation of source. This means
that shall you have income elsewhere related to property rentals
or interests, these shall also be declared to the Chinese
tax authorities. The taxes paid overseas can be deducted from
the taxes payable to the Chinese tax authorities. To be fair,
we did ask the State Administration of Tax if they had ever
collected such revenues, and the honest (and slightly bashful)
answer was "No" — however why expose yourself
to such a law without reason ? It's easy to avoid so count
those days and give yourself a month out of China every 5
years.
Work Permits Registration Procedures
If you are based in China and working here, then you should
apply for working visa, working permit and residence card.
Please be aware that constant checks in residential areas
are conducted by the local Public Security Bureau and one
of the first things you should do when you arrive and rent
an apartment in the country is to get registered with the
local Pai Chu Suo (local police responsible for your area).
Before you obtain all the documents mentioned above you should
also go through a medical examination at the appointed local
hospital. It should not take you more than a couple of hours
to get through the exams with the results normally being issued
the day after (or if you pay more on the same day!).
Your spouse and children (if any) would also have to register
with the local authorities.
Tax Rates & Liabilities
The first RMB4,000 of your earnings in China are tax free.
That does not mean you can rush out and declare salaries of
RMB4,500! The tax bureaus are wise to this and will demand
to see concrete proof of your earnings elsewhere. If you can't
provide this they may refuse to register you, effectively
immediately making your presence in China illegal.
China's IIT rates are high compared to neighbouring countries.
The following table demonstrates salary brackets and tax rates,
plus the quick tax deduction system. Your Total Liability
can be calculated as follows:
Salary minus 4000 x Tax Rate, less Quick Deduction Figure
= IIT Tax Bill
Monthly Taxable Salary-----Tax Rate-----Quick Calculation
Deduction
From RMB500 to RMB20,000-----20%-----RMB375
RMB20,001-40,000-----25%-----RMB1,375
RMB40,001-64,000-----30%-----RMB3,375
RMB60,001-80,000-----35%-----RMB6,375
RMB80,001-100,000 -----40%-----RMB10,375M
In excess of RMB100,000-----45%-----RMB15,375
There are some implicit or explicit benchmarks at local tax
bureaus on what a reasonable salary is in certain industries
and this could vary with your position, your education background
and the country you come from. Local authorities have the
power to increase your declared salary. Should this be manifestly
low or inadequate to your position, they shall assume and
obtain the proved confirmation that you are deliberately reducing
the figure to escape from a higher IIT threshold. This can
be enormously damaging for you and your employer who would
be placed under far greater tax scrutiny in the future for
potential tax evasion issues within the business.
Deductible Allowances
China is also pretty reasonable as regards non-taxable elements
as part of an expat package, however some attention may need
to be paid to the structuring of the inclusive package with
certain items needing to be properly defined in the employment
contract.
As a rule of thumb, if you pay for the expenses yourself (against
local official invoices) and the company provides you cash
allowances, then these are considered taxable. However, if
the company pays for certain expenses on your behalf (for
ex. Your apartment rental), then this kind of allowance is
not taxable and can be deducted from your company FEIT computation
basis.
Benefit Taxable as Part of Overall Package?
Hardship Allowance - Yes
Housing at Cost - No
Fixed Housing Allowance - Yes
Free Use of Vehicle - No
Fixed Expenses Paid in Cash - Yes
Reasonable Expense Reimbursed - No
Reasonable Home Leave Allowance - No
Reasonable Education for Dependents - No
Enterprises are obligated to withhold employees' IIT when
paying salaries to them; failing to do so will cause penalties.
Meanwhile, the enterprises can get 2% of the IIT withheld
from the tax bureau as commission. Pay attention to the calculation
of the IIT if the companies are paying IIT for the employees,
in this case the income has to be grossed up for the purpose
of calculating IIT.
Individual Income Tax calculations for standard salaries are
fairly easy to assess, but get more intricate according to
the complexity of the expatriate's salary package. It makes
sense to take professional advice when structuring expatriate
salary packages to ensure liabilities can be planned, and
catered for in the most tax-efficient manner.
Non-Compliance Penalties
No Government likes tax evasion and China is no exception
to the rule. The penalties for late payments, non-payment
and other transgressions (naivety is no excuse) can be severe
— often up to five times the amount due, plus the original
liability. In cases of blatant evasion, businesses can have
their licenses withdrawn and assets seized. If you have any
doubts, please seek professional advise immediately —
this is the one area it is best not to mess about with, fees
spent on decent advise are less than the amounts levied in
fines and penalties!
Please Contact Us or
send email to info@bycpa.com
for further information. |
