Comments to the NPC's Draft Amendment to the Individual Income Tax Law

2018-07-27 | All chapters

The European Chamber welcomes the decision of the National People’s Congress to publicly call for comments on the Draft Amendment to the Individual Income Tax Law. We expect that implementation rules will be issued soon to clarify many aspects of importance, such as the circumstances under annual tax declarations are required, withholding methods and in which circumstances double taxation agreements and social security agreements will rule. Additionally, we expect further clarification in the tax regime applicable to foreign nationals. Upon the circulation of the draft within its relevant working group members, we would like to propose the following comments for consideration of the National People’s Congress.

The new draft proposes a number of important measures to improve the tax system, and the system of collection and management, most of them in line with international standards and with the objective of stimulating domestic demand. The measures proposed include the introduction of the concept of tax resident and non-resident; the implementation of comprehensive income taxation by consolidating income with similar nature; the optimization of the structure of tax rates; the increase of standard deductions; and the addition of special deduction items (e.g. children's education expenditure, major illness, etc.), among others, which all make higher requirements to tax compliance, withholding compliance and declaration compliance for enterprises and individuals. The introduction of tax reporting on consolidated income, the increase of IIT standard deduction threshold, and the added specific deduction amounts may bring significant changes to the tax payers and tax administration. The reform is an important measure to promote the development of China's individual tax system.

However, it is worth noting that this Draft Amendment can be expected to have a profound impact on the current tax policies for foreigners working in China. For this reason, it is recommended that legislators fully consider this change and further introduce reform measures to attract overseas high-level talents to work in China. For example:

  • Tax residence: The change of the definition of tax resident/non-resident included in the Draft Amendment will have profound consequences on the IIT treatment for foreign nationals. Under the Draft Amendment, anyone who stays more than 183 days in China, during a solar year, has to declare any income, wherever sourced, in China. However, the proposed 183-day rule to define a tax resident may affect the current relevant IIT regulations for foreign nationals, exert a negative influence on the relevant foreign nationals and companies and act as a deterrent for valuable high-income talents, who might want to stay in or move to China. Therefore, we strongly recommend to remove it and keep the old rule, under which worldwide taxation in China is avoided, provided that a foreign resident exits the country for 31 consecutive days or 90 cumulative days in a solar year, within the 5th year of residence in China. Regarding the issuance of certificates of tax residence, the current application procedure is too complicated. Under the current procedure, tax payment and periods of stay in China of foreigners have to be justified. Consider if this can be changed under the new IIT law with a more streamlined application procedure as usual in international tax practice, i.e. a tax residence certificate can be obtained online in no time. Domestic tax practice should be improved compared to issuance of tax residence certificate in other countries abroad for tax residents.
  • Commercial insurance for foreign employees: It is common that foreign employees that are expatriated to work in China would have commercial insurance assumed by the Chinese employer. Under the prevailing tax rules, such insurance premium is taxable. Although the PRC tax rules does not forbidden the allocation of insurance premium on a monthly basis, the practice at present is that the insurance premium is filed in one particular month which the invoice is received from the insurance company. It is considered that the commercial insurance shall be tax exempted from the foreign employee’s taxable income. If this is not feasible, the PRC tax rules shall specify the feasibility of the allocation of insurance premium on a monthly basis.
  • Tax regime for foreign talents/professionals: in the light of the spirit of alignment with international tax practice shown by the authorities in this Draft Amendment, we recommend the authorities to create a special tax regime for foreign professionals resident in China, similar to those regimes available in many European countries for Chinese professionals resident there for labour reasons. Under such regime, foreign professionals can choose between paying taxes as a normal tax resident in the destination country or be subjected to a flat tax rate for their worldwide income.

Besides, some old issues of concern have not been addressed in the proposed amendment draft. For example:

  • IIT filing is still carried out on a monthly basis, rather than in an annual basis, easier to declare and manage and aligned with international standards.
  • The existing calculation method for annual bonus has not been modified and consequently it might result in higher gross amount but a lower net amount in certain cases. Nevertheless, such issue does not exist in the IIT calculation for monthly salary, since the quick deduction is adjusted for monthly salary rather than annual bonus.
  • The standard deduction level remains low compared with other markets.
  • Comprehensive filing categories (e.g, the joint-filing/joint filing separately, etc) have not been created.

Therefore, in order to guarantee a smooth transition, we suggest the legislature takes a more careful attitude towards the enactment of tax provisions and announces practical instructions and detailed explanations in order to implement the reformed taxation laws effectively.