NEW PRC INDIVIDUAL INCOME TAX 2018 – WHAT ARE THE MAIN CHANGES?

Published On - 28 décembre, 2018

Albert Hui China, Actu Orbis

The implementation rule of revised PRC IIT Law and provisional measures for allowed additional itemized deduction were released on 20th October 2018. This 7th revision of the PRC IIT Law will become effective from 1st January 2019. It is the most significant breakthrough in 38 years.

Key amendments

1. Redefined definition of « PRC TAX RESIDENTS »

The Revised IIT Law has superseded the one-full year threshold by 183 days. This change is more in conformity with global conventions.

According to Art. 4, non-China-domiciled individuals will be eligible for PRC IIT for different portions of their income according to the length of their stay.

A. Foreign individuals, as well as individuals from Hong Kong, Macau and Taiwan, are eligible for PRC IIT for their portion of non-China sourced income borne by Chinese enterprises, other economic organizations or PRC Tax residents only, but have to fulfil the following requirements:

–  stay more than 183 days accumulatively

–  not reside in China for five consecutive years

–  have a single absence from mainland China for more than 30 days

–  be subject to proper registration with in-charge tax authorities

B. Individuals who are subject to PRC IIT on 100% of their non-China sourced income starting from the sixth year of stay:

–  must stay more than 183 days in every year for five consecutive years

–  not have a single absence for more than 30 days

2. New term “Comprehensive income”

The Revised IIT Law centralizes four different types of incomes as “comprehensive income”. The following incomes are consolidated as one annual integrated income subject to aggregate IIT rate and apply only with PRC Tax residents.

  1. Salaries and wages
  2. Independent incomes
  3. Income from author’s remuneration
  4. Royalty incomes

Non-PRC tax residents are still subject to PRC IIT under different income categories on a monthly basis. Foreign individuals should pay attention to the timing of taxation.

All other incomes such as operating incomes, interest incomes, dividend incomes, capital gains from rental income/property transfer and occasional incomes, are still subject to PRC IIT under different income categories at a 20% rate .

It is still imprecise if the applied tax treatments should be implemented to annual bonus and stock related incentive due to the consolidation of annual comprehensive income.

3. Increased Monthly Standard Deduction (MSD)

The individual income tax threshold is amended to 5,000 RMB per month or 60,000 on an annual basis for Chinese citizens and foreign individuals alike. Where there is a PRC IIT withholding agent to withhold and pay monthly PRC IIT on behalf of individual taxpayers, the monthly taxable income is the monthly income against 5,000 RMB, itemized deductions, additional itemized deductions and other allowable deductions based on the Revised IIT Law.

4. Allowed Additional Four Itemized deductions (AAID)

In addition to the allowed deductions, taxpayers are also allowed to deduct the following Additional Itemized Deductions:

  1. Children’s education, occupational education
  2. Medical expenses for serious illness
  3. Interests for housing loan or rental expenses
  4. Dependent care for elders

The Draft Deduction Provision has released the upper limit and details about the additional itemized deductions. One of the articles has got the taxpayers’ attention. The taxpayer should when applying for the AAID for the first time or occurring a change of information, submit authentic related documents to the withholding agent or in-charge tax authorities. The related documents can obtain personal information of the taxpayer, spouse, children and parents and more.

The AAID cannot be enjoyed simultaneously for the interests for housing loan and rental expenses by the taxpayer and their spouse. The AAID can only be deducted from the taxable portion of annual comprehensive income for the current year.

For those who derive salaries and wages from two or more sources at the same time, they can only choose to deduct the AAID from one source.

5. Adjusted progressive tax rates

Level Salary range Tax rate Quick deduction
1 0 – 3,000 3% 0
2 3,001 – 12,000 10% 210
3 12,000 – 25,000 20% 1,410
4 25,000 – 35,000 25% 2,660
5 35,000 – 55,000 30% 4,410
6 55,000 – 80,000 35% 7,160
7 80,000 above 45% 15,160

Simulation salary and wages:

Gross salary 20,000 RMB
SMD – 5,000 RMB
Taxable net Income = 15,000 RMB
Tax rate 20%
Quick deduction 1,410 RMB
IIT Payable 1,590 RMB
Total taxes = 1,590 RMB
Net Income = 18,410 RMB

6. Improvement of Foreign Tax Credit (FTC)

Foreign tax means tax that has been paid on non-China sourced income by a PRC tax resident in accordance with tax laws of foreign countries. The FTC limit means taxes should be paid on non-China sourced income in accordance to PRC Law and it is limited to the sum of comprehensive income, operational income and other income derived from a foreign country. This rule can only be carried out for five years.

7. Introduction of General Anti-avoidance Rule (GAAR)

The GAAR clause is incorporated in Art. 25-29 for the first time in the Revised IIT Law. As in the corporate tax law, the in-charge authority may make special tax adjustment (STA) with respect to an individual in a reasonable manner.

China has agreed to exchange financial account information with other countries in accordance with the Common Reporting Standard (CRS). This means that China has the right to know an individual’s overseas incomes on his overseas bank accounts and tax authorities will perform tax audits on high-risk taxpayers. PRC will gain strong legislative authority on CRS implementation.

High net-worth individuals should pay close attention to the changes of the Revised IIT Law, as it will affect them the most. If needed, they have to review their current asset portfolio and compliance status of overseas investment structures. They should take necessary measures to secure tax planning arrangement and compliance status before 1st January 2019.

8. Annual Tax Clearance (ATC)

The current annual self-reporting date for individuals whose annual gross income is above 120,000 RMB is March 31 of each following year. This date will remain the same for 2019, but it is not explicitly mentioned if in the future the annual comprehensive income will supersede the annual self-report.

In the following cases you have to go through ATC:

  1. Comprehensive income received from multiple employers/payers and the remaining amount of total Annual Comprehensive Income over Special Itemized Deduction is more than 60,000 RMB.
  2. Incomes derived from independent labour services, author’s remuneration, and royalties and the remaining amount of total Annual Comprehensive Income over Special Itemized Deduction is more than 60,000 RMB.
  3. Amount of taxes paid during the tax year is less than the actual tax payable amount.
  4. The taxpayer has to go through the ATC process to apply for a tax refund. To be able to apply for a tax refund, the taxpayer has to have a bank account in China.

The ATC is not required for non-PRC residents who have a withholding agent for salaries and wages, incomes for independent labour services, author’s remuneration and royalties. The withholding agent should withhold and pay PRC IIT monthly or as tax events occur.

If you wish to obtain more information or assistance, please do not hesitate to contact us at contact@orbis-alliance.com.