On a hot day in May in Shanghai, the Canadian Chamber of Commerce in Shanghai held an information session about a hot topic for many expats working in China - individual income tax.
The session was hosted by CanCham member Grant Thornton with partner David Luo imparting over 15 years' of tax wisdom to an eager audience.
Below is a summary of Mr. Luo's comments. This does not constitute tax advice and we suggest seeking out an experienced tax professional if you want to learn more or have any questions.
Key takeaways
The biggest news is that the Chinese government is in the process of overhauling its income tax system, and this will have big implications for anyone working in China.
The reforms will be rolled out by the end of this year or early next year if everything proceeds according to plan.
But first, a little bit about China's current income tax regime.
Unlike many western countries that use an integrated personal income tax system, China uses a classified personal tax system.
What's the difference?
A classified personal tax system classifies different types of income and taxes them at different rates. In an integrated system, all sources of income add together to give one total taxable income which is taxed at one rate.
In China there are 11 categories of income, such as:
This kind of system is relatively easy to administer and the collection of employment income is done through "withholding at source." In China, the majority (over 60%) of IIT is from employment income.
However, the current system can be unfair. Depending on where your income comes from (salary, dividends, interest, rental) two people making the same amount of money can be taxed at different rates. For example, if one person's income came entirely from rental properties, they would be taxed at the fixed rate of 20%. Another individual with the same income that came purely from their salary could pay as much as 45% in tax!
China is therefore in the midst of personal tax reform, moving towards a "comprehensive personal tax system" - a combination of integrated and classified system where items will no longer have different treatments and tax rates.
The goals of the new system are:
Since many expats in China fall into the "high-income group", this means they can expect to pay more taxes once the system is in place. The tax payer will also have to be prepared for some challenges - a more complex system of submitting annually to the tax bureau is another downside of the proposed changes.
It is not uncommon for an employer to give a lower percentage of your pay as salary and the rest as an allowance, taxed at a lower rate. For example, a home lift ticket provided by the employer for travel from your workplace back to your home town is tax deductible, as is language training. This could come under increasing scrutiny with employers being required to provide proof by showing a record of reimbursements such as fapiaos, rental agreements, etc. The company should have a tax policy registered with the tax bureau for expat benefits.
There is some good news, though. In the future, in addition to those already mentioned, more deductions will be possible, like illness expenses, medical treatment, children's schooling, bank interest (i.e. for house mortgage), etc.
There are some other changes too. The local tax bureau and the state tax bureau will merge and share information, and social security will now be paid to the tax bureau, not to the social security bureau as before.
The nationwide system to share tax information across jurisdictions is called the Golden Tax System, and there have been several iterations of it since its initial introduction in the 1990s. It first focused on valued added tax and the authentication of fapiaos (itself a fascinating and confusing topic!) It has also brought different jurisdictions under one system, so sharing of information can be done without having to make a request.
Under the old system, the information you had to disclose on your tax return included: Name, nationality, ID number, DOB, contact address/phone, income period, income categories, etc.
Under the new system, more information will have to be reported:
Basic information
Be prepared for a more detailed and complicated tax return.
If you work in China but have other income derived outside of China, take note!
If you have lived in China for 5 years, not only is your China-based income taxed, but your global (i.e. non-Chinese) income is also taxable in China. However, if you spend 31 consecutive days outside of China before the five years, then you don't have to pay tax on your global income to China.
Another category of expat working in China is the frequent traveler who is not a regular employee or assignee of a Chinese company. These individuals come to China regularly to provide service, their work location is not necessarily at a fixed location, they might be meeting clients at their premises, and their payroll is usually outside of China.
These types of workers can easily slip through the cracks, especially if the company is not particularly diligent. But according to Chinese law, if the worker spends more than 183 days in China, the company needs to pay tax and the worker pays income tax to China.
More information will be coming out as the new policy is implemented. Again, I encourage everyone to get in touch with your tax professional (or find one!) to make sure you are prepared!