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.
The current individual income tax (IIT) system is being overhauled
Expats with high incomes will probably end up paying more in tax soon
Your tax return is going to get more complicated
If you live in China for 5 years, your income made outside of China will also be taxed in China BUT you can leave for 31 consecutive days before 5 years is up and "reset the clock" so to speak
Expats working in Shanghai do not have to pay social security in China as long as their work permit was also issued in Shanghai
There is currently a 4800 RMB/month deduction for expats (i.e. you don't pay tax on that portion of your income).
Frequent travelers but non-full time employees must pay income tax to China if they work in China for 183 or more days
There are a variety of benefits that are tax deductible, e.g.: Home lift tickets - your employer covers the expense of your trip home - twice a year are untaxable, however it must be from the city you live/work in China to your home town; Rental reimbursements from your employer are tax free; Language training for studies within China
Income Tax Reform - Coming Soon！
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.
China's Income Tax System - Classified v.s. Integrated Personal Tax
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:
Employment income, a progressive tax from 3% to 45%
Personal service income, 20-40% (includes such activities as consulting, independent service, and other service contracts with no employment arrangement)
Rental income, 20%
Income from transfer of properties, 20%
Interest, dividend income 20%
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!
Personal Tax Reform
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:
Achieve tax equity and intensify IIT collection on high-income groups
Enhance tax payer's self compliance and "good citizen" awareness
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.
Golden Tax System
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:
Withholding income return
Whether taxpayer is shareholder/investor
Residency status of tax payer
Date of arrival, assignment period, estimated departure date
Domestic and overseas roles
Pre-tax deduction: mandatory social security contribution
Qualified deductible donation
Other tax relief
Be prepared for a more detailed and complicated tax return.
Global Income - 5 years
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.
Frequent travelers and managing tax risk
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！