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published on February 7, 2019 | reading time approx. 4 minutes
Confusion still exists in China - The new Individual Income Tax (“IIT”) Law has fully come into force. However, quite a few tax treatments that apply to foreign taxpayers are still not clearly stipulated, especially to those who do not fulfil the requirements as a Chinese resident taxpayer and also to the withholding agents who are responsible for preparing tax declarations.
In practice, taxpayers may hold dual positions simultaneously within and outside China, and obtain salary income from both domestic and overseas companies. Taxpayers need to travel frequently entering and leaving China, in order to fulfil the dual responsibilities. According to the implementation rules of the IIT Law, income derived from activities outside China due to employment should be defined as foreign-sourced income. Furthermore, foreign-sourced income derived by non-resident taxpayers and resident taxpayers who fulfil certain conditions are exempted from Chinese IIT to varying degrees.
According to former IIT related regulations, tax exemption treatment on foreign-sourced income functioned by reducing the final IIT payment, i.e., calculating the total IIT amount on both China- and foreign-sourced income as the taxation base, then reducing the IIT payment that attributed to the foreign-sourced income in proportion.
According to the so-far released regulations related to the new IIT Law, the tax exemption treatment on foreign-sourced income is still not clear. It could continue the IIT payment reduction treatment as before, or as an alternative, it could reduce the taxable income directly by making exemption on the taxation base. A guidance from future tax regulations is still required.
Chinese employers, as withholding agents, should take the total salary amount paid from China as taxation base, calculate and withhold IIT in the monthly declaration for prepayment purpose. Adjustments for IIT liabilities on China- and foreign-sourced salary income can be made via annual IIT settlement, following future tax regulations to be released.
It is stipulated by current tax regulation that resident taxpayers may continue to use the former tax preferential treatment on annual-performance related bonus, i.e., dividing the bonus amount by 12, determining applicable monthly tax rate and calculating the IIT payable separately, during the 3 years' transition period. While the tax treatment for non-resident taxpayers' annual bonus is not mentioned. According to our consultation with local tax authority, it is very likely that non-resident taxpayers would not be applied to the former tax preferential tax treatment on annual-performance related bonus any more. The China-sourced bonus will be fully combined with the regular monthly salary for tax calculation, or alternatively, be treated as bonus for several months, and taxed with the tax rate to be determined separately.
As is known, non-resident taxpayers may not be applied to the additional special deductions under the new IIT Law, while it is not clear if non-resident taxpayer, could continue to enjoy the current IIT-exempted allowances, i.e., housing allowance, Chinese language training fee, children's education fee, meal and laundry expense, home-trip expense and relocation fee. We have noticed that relevant explanations vary among different tax officers, which has brought challenges in IIT filing practices for non-resident taxpayers.
In view that non-resident taxpayers normally stays in China for less than 183 days in a calendar year, if the withholding agents continue to apply the IIT-exempted allowances to them, they may take the risk of not being able to trace the underpaid IIT liabilities after the taxpayers leave China.
On the other hand, if the withholding agents cancel the IIT-exempted allowances for non-resident taxpayers, which however proves to be applicable afterwards, the tax refund application might also be difficult in practice after the taxpayers leave China.
The above matters need to be clarified by the tax authority in the near future. It is recommended that taxpayers and withholding agents pay close attention to relevant future tax regulations.
Monica Chen
Associate Partner
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