Guideline for Annual Tax Declaration

On 31 December 2019, the SAT published the final guideline for the first annual IIT reconciliation in China since the revolution of Chinese IIT Law in 2019. The first annual IIT reconciliation will take place from 1 March to 30 June 2020.

Annual IIT reconciliation is a tax settlement for an individual’s annual income, taking the IIT withheld by each withholding agent when paying the relevant income into consideration.

The following resident taxpayers are obliged to perform an annual IIT reconciliation:

• Who receives comprehensive income, i.e., wages and salaries, labor service income, author’s remuneration and royalty income, from two or more sources, and the annual comprehensive income after the deduction of social security contributions exceeds RMB 60,000;
• Who receives labor service income, author’s remuneration and/or royalty income and the annual comprehensive income after the deduction of social security contributions exceeds RMB 60,000;
• Who has IIT to be further paid or needs to claim for IIT refund.

Under the prevailing withholding IIT calculation methods, it could happen that each withholding agent of each category of individual income has withheld IIT in accordance with the relevant tax regulation, and there still exists further IIT liability to be settled when the individual combines all the income together and tax it on an annual basis, which is basically resulted from the annual progressive tax brackets. On the other side, tax overpayment is also possible if the RMB 60,000 annual tax threshold is not fully utilized when IIT is withheld.

In order to lighten the compliance workload for both tax authorities and taxpayers, as a temporary preferential policy, the following groups of individuals can be exempted from performing the annual IIT reconciliation for the years 2019 and 2020 in China:

• Individual whose annual comprehensive income is no more than RMB 120,000 and has IIT to be further paid, while the withholding agents of the comprehensive income has withheld IIT according to the relevant tax regulations;
• Individual who has IIT of no more than RMB 400 to be further paid and the withholding agents of the comprehensive income has withheld IIT according to the relevant tax regulations.

For individual who needs to claim IIT refund through the annual reconciliation, as expected, it is required that they should hold a bank account within Chinese territory to facilitate a direct remittance of the refunded tax from the national treasury system. Therefore it remains to be a question how foreign individuals who came to China on a travelling basis without holding a resident permit can proceed IIT refund application via the annual reconciliation, in view that foreign individuals without resident permits are generally not able to open a bank account in China.

The guideline has suggested that taxpayers can authorize their withholding agents or tax agents in China to perform the annual reconciliation for them on behalf.

Especially withholding agents will be obliged to do that if requested by taxpayers. Therefore it is to be discussed with the local tax authority on practical perspective whether the bank accounts of the withholding agents or tax agents involved can be utilized for tax refund purpose, upon authorization by the above-mentioned foreign individuals, who are not able to open a bank account in China.

It is noticed that the guideline is particularly published for the annual IIT reconciliation for year 2019 in China. It is expected that practical problems may come up during the progress of the first reconciliation and the Chinese tax authority may modify the guideline upon feedback from taxpayers in the future.