NEW IIT Law in the PRC
“PRC Individual Income Tax Law (Amendment)” (“the New IIT Law”) has been passed by the National People’s Congress of the People’s Republic of China on 31 August 2018 and will be effective from 1 January 2019, while part of the New IIT Law including the minimum threshold for personal income tax exemption is scheduled to go into force on 1 October 2018.
The State Administration of Taxation will deliberate and set up the execution method to ensure the tax payers could enjoy the deductions upon monthly tax filings. Individuals could provide the information regarding the special expense deductions to the respective reporting agent, normally the employer. When releasing the monthly salaries, the employer could apply the deductions accordingly when preparing the monthly individual income tax (“IIT”) filing on behalf of the employee. Even the employees were unable to fully enjoy or even unable to enjoy the deductions in the monthly tax filings, tax refund could be applied upon the annual tax declaration in the following year.
The main amendments of the existing PRC IIT Law are introduced as below:
1. Introduce the definitions of residents and non-residents
For a non-resident, who is non-domiciled in mainland China and has lived in mainland China for less than 183 days in a calendar year, he or she would be subject to IIT on his or her China-sourced income.
For an individual domiciled in mainland China OR an individual not domiciled in mainland China but has lived in mainland China for 183 days or more in a calendar year, the individual will be regarded as “resident” and subject to IIT on his or her global income.
The New IIT Law re-defines the criteria of being a tax resident in the mainland China by changing the current rule from residing in China for 5 full consecutive years to residing in China for 183 days in one calendar year.
2. To include 4 types of income for consolidated tax computation
The New IIT Law allows 20% deduction for the personal service income, manuscript fee income and royalty income. On the other hand, to encourage creation, for manuscript fee income, on top of the 20% deduction, further 30% deduction is allowed. The total deduction will be 44% of the manuscript fee income which could significantly reduce the tax burden.
Tax residents calculate IIT by the Consolidated Income on an annual basis while non-residents calculate IIT by the Consolidated Income on a monthly basis or occurrence basis.
The New IIT Law includes 4 types of income, which are salaries and wages, personal service income, manuscript fee income and royalty income (“the Consolidated Income”) into the scope of consolidated taxation which would be applied with the standard progressive tax rates.
3. To optimize the tax rate structure
Introduce the Consolidated Income tax rate: The resident individual under the New IIT Law, would now has the obligation to report all his or her Consolidated Income on annual basis.
Adjust the levels between different tax rates: Enlarge the levels of 3 lowest tax rates of 3%, 10% and 20%. The levels of the 3 highest tax rates of 30%, 35% and 45% remain unchanged.
Business income tax rate (for sole proprietors): Base on the existing tax rates for the manufacturing income, business income, contracting income and leasing income of sole proprietorship, the 5 level tax rates of 5% to 35% remain unchanged. However the levels between the tax rates have been enlarged and the minimum threshold applicable to the tax rate of 35% will be increased from RMB100,000 to RMB500,000.
4. Increase the minimum threshold for the personal income tax exemption
The New IIT Law increases the minimum threshold for the personal income tax exemption from RMB3,500 to RMB5,000 per month or RMB60,000 per annum. The RMB5,000 minimum threshold could be adjusted from time to time.
5. Additions of special expense deductions
In addition to the existing allowable deductions, such as Basic Pension Insurance, Basic Medical Insurance, Unemployment Insurance, Housing Provident Fund, and other allowable deductions, the New IIT Law also introduces additional special expense deductions, including Children’s Education, Caring for the Elderly, Continuing Education, Treatment for Serious Diseases as well as Housing Loan Interest and Rental.
The State Council will later announce the criteria, amount and execution procedures of these additional special expense deductions.
6. Introduce anti-avoidance rules
With reference to the respective anti-avoidance rules under Enterprise Income Tax, the New IIT Law introduce anti-avoidance rules that the tax authority shall be empowered for tax adjustments if the transactions of an individual are unreasonable and not in an arm-length basis, an individual reduces the tax burden by deploying foreign tax heaven, an individual enjoys tax benefits by involving unreasonable commercial arrangement, etc.
In our opinion, in addition to the effects on Chinese residents, the New IIT Law also has great impacts on the foreign expatriates working in China and residents of Hong Kong, Macau and Taiwan who are working or retiring in China. Anyone who resides in China for 183 days or more in a year will be regarded as the PRC tax resident and his or her global income, including salaries and wages, business profits, bank interest income, dividend income, rental income, gain on disposal of properties, or even incidental income will be subject to PRC IIT. This change has tighten the current rule that anyone who resides in China continuously for 5 years would be defined as tax resident.
If that individual has to pay IIT base on his or her global income and foreign tax has been paid for that income, that individual might be eligible to claim tax credit to offset part of the IIT payable. In addition, one of the committee members of Nation People’s Congress claimed that there should have special arrangements that Hong Kong and Macau residents should have “5 years exemption” and the new definition of tax resident will only be applied to Hong Kong and Macau residents in 2024 the earliest. However, all enforcement details are still pending for further Government’s announcements.