Social Security Collection: New Duty for China’s Tax Authorities

published on 24 November 2020 | reading time approx. 3 Minutes

Starting from November 2020, the collection of Chinese mandatory social security contributions is being taken over by tax authority (hereinafter referred to as “the collection handover”), as officially announced by the major cities and provinces including Beijing, Shanghai, Shenzhen, Shandong, Shanxi, Hunan and Sichuan, at the end of October.

  
  
The collection handover was scheduled to be implemented in 2019 and finally hit the ground before the end of 2020. Since handover, it is still the social security administration center who takes the responsibility of verifying and determining the contribution level but shall forward the information to tax authority for collection purpose. Employers should then transfer the verified contribution amounts, including the employee's portion to be withheld from the employees' monthly salaries and the employer's portion to be matched by the employer, to the tax payment bank account for settlement.

According to the relevant regulation regarding social security calculation, the social security contribution amounts should be determined with stipulated contribution ratios and a calculation basis, which should be the average monthly salary income of the last calendar year. The upper limit and the lower limit of the calculation basis are updated once a year, which shall be adopted to employees whose actual average salaries are above the upper limit or below the lower limit.

With automatic information exchange to be realized by the upgraded system, the tax authority will have access to the verified social security contribution amounts at any time, which would further facilitate the data comparison between the social security calculation basis and the taxation base of employees' monthly salaries of the last year. When significant gap is spotted in the data comparison, the tax authority could receive an immediate alert which may lead to a further investigation into the social security contribution or tax declaration.

Before the collection handover, it was noticed that some companies calculated and made social security contributions by referring to the lower limit of the local calculation basis, instead of based on employees' actual salary income, out of cost saving consideration. Although with compliance flaw, such practice usually did not trigger a direct investigation from the social security administration center, probably due to the fact that the administration center usually did not have the first-hand salary information.

While after the collection handover and the upcoming data comparison, the former practical tolerance may not exist anymore. It is recommended that companies should calculate their social security contributions in full accordance with the relevant regulation since handover. As for the formerly underpaid social security contributions if any, we do not see a significant risk that tax authorities will trace a backward settlement, in view of the extensive coverage of companies with such problem.

In the collection handover notice, punishment rules are not mentioned. From legal perspective, it is unlikely that underpayment of social security would be subject to punishment by referring to tax evasion. Especially, in view that the social security administration center is still responsible for verifying and determining the contribution amounts for each company, tax authorities are simply taking over the payment collection and information exchange functions at the current stage. The local social security administration centers might still be in charge of the administration issues including disputes solving and punishment imposing.

In practice there exist companies who make tax declaration in-house but outsource social security payments to qualified HR agents such as FESCO. When the collection handover is implemented, it is still to be observed how such practice will be influenced when social security and tax payments of one company are settled by two separate parties.