On November 13^th, Winson Capital partnered with PwC Shanghai to hold a seminar regarding the changes with the Individual Income Tax Laws (IIT) in China. The seminar was very well received, and we have had some fantastic feedback from those that attended. The seminar was followed up with a chance to network with a glass of amazing Italian wine and a great buffet.

PwC Shanghai

PwC is one of the world’s leading accountancy and tax advisory companies and we were confident that by partnering with them, they would help to give a deeper insight into the new IIT law changes and of course answer any questions that arose. If you didn’t get the chance to join us, below is a summary of the changes;

Among the key changes introduced in the recently passed IIT law is the determination of tax residency in China. The new law is set to reform IIT in the country, for both Chinese Nationals and foreign residents in China.

Tax Resident in China

Implemented on January 1, 2019, an individual who resides in China for 183-days or more will be considered a tax resident. Additionally, these individuals will be liable to PRC (People’s Republic of China) IIT on their global income.

This stipulation will replace the previous ‘five-year-rule‘, under which a foreign individual was subject to Chinese taxation on worldwide income. However, considering that they have lived in China for more than five years.

The previous five-year threshold was easily circumvented by expatriates who would choose to leave the country for 91 days per year. This individual would then have 31 consecutive days to ‘reset the clock’ on the five-year threshold.

An important note is that in the public opinion this ‘five-year rule’ will be kept but it has not yet been confirmed.

The new IIT law is set to ease the tax burden for low to mid-income earners. Due to the cost of living in China increasing in recent years, a tougher stance on both foreign workers and high-income earners has been taken.

Expanded Tax Deductions

This is also done through expanded tax deductions – including for children and the elderly – which come at a time when China’s population is rapidly aging, and the government is encouraging families to have more children.

The State Council also announced RMB 45 billion (US$6.59 billion) worth of tax cuts, a day before the IIT law passed. Both the tax cut and the IIT reform aim to boost the economy amid China’s escalating trade war with the US and signs of a slowing economy.

On October 1, 2018 the new tax brackets and standard deduction amounts have taken effect, while on January 1, 2019 the remainder of the new personal income tax laws will come into force.

Beginning October 1, 2018, the standard deduction on comprehensive income has increased from RMB 3,500 (US$512.1) for resident taxpayers and RMB 4,800 (US $702.3) for non-resident taxpayers to a unified RMB 5,000 (US$731.6) per month.

This will raise the annual threshold to RMB 60,000 per year, which is equivalent to an extra annual deduction of approximately US$ 8,779.2 per year.

The new IIT law also provides a new category of ‘special additional deductions’.

Resident Taxpayers

Resident taxpayers will now be able to deduct the following additional items from their comprehensive income under a revised Article 6:

• Education expenses for children;
• Expenses for further self-education;
• Healthcare costs for serious illness;
• Housing loan interest;
• Housing rent; and
• Support for the elderly (added in the final draft).

Charity deduction is also now deductible.

The new IIT law now provides discount incentives for certain categories of income. Income derived from labor services, author’s remuneration, and royalties are to be calculated with a 20 percent discount. This will be before forming part of the monthly ‘pre-tax income’.

In addition to this, author’s remuneration will be subject to a further 30 percent discount. Directly to be applied on the monthly pre-tax income.

Defining the Tax Brackets

For comprehensive income: the lower tax brackets have been expanded. This means that they are now applied on a wider range of income levels, while the higher tax brackets remain the same.

The categories of ‘income’ subject to IIT have now been simplified and amended. Now, a 3-45 percent progressive tax rate applies to income derived from labor services, author’s remuneration, and royalties.

In effect, traditionally taxed at a flat rate of 20 percent, individuals are now taxed at progressive rates.

The IIT reform marks a significant change to China’s taxation policies. With the introduction of the new IIT law, low- and mid-income earners enjoy greater tax relief. Subsequently, individual taxpayers of all stripes benefit from a broader range or deductibles.

At the same time, foreign workers may be taxed with greater scrutiny. And tax authorities have been given greater capabilities to enforce rules and expand tax collection.

For more information, contact Winson Capital to arrange a meeting with one of our consultants.

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