On August 31st, China’s top legislature approved the revised Individual Income Tax (IIT) Law in their attempts to work towards a fairer income distribution. Upcoming changes allow for some growth in incomes, but also redefines the meaning of a resident individual in China, thus directly affecting foreigners working in China.
As the SCMP reports, the final approved bill increases the monthly tax-free threshold to 5000 yuan (60 000 yuan per year), as compared to the previous 3500 yuan per month. The new tax threshold will apply to both local Chinese employees and foreigners working in China. The upcoming changes thus take into account the increase in consumer spending and aim to lessen the overall tax burden on taxpayers, especially of for the low to middle income group of consumers, allowing for some growth in average incomes before taxes kick in.
Taxable income is total income in a tax year minus the personal deduction of 60 000 yuan, specific deductions, itemized deductions for specific expenditures, and other deductible items.
The NPC Observer reports that in addition to “special deductions” (专项扣除) for social insurance contributions, the new bill for the first time introduces special expense deductions (专项附加扣除) for resident individuals. These include, but are not limited to, parental elderly care, children’s education, continuing education, treatment for serious diseases, housing rental and housing loan interest – however, more details on these are yet to be released.
The revised law recognizes two types of tax-payers, namely resident individuals and non-resident individuals. The length of residence used to distinguish between the two groups will now be adjusted to 183 days from the previous one full year and the tax year runs from 1st of January until the 31st of December.
In addition, for resident individuals, IIT on comprehensive income would be calculated annually (as opposed to monthly under the current Law) based on the total comprehensive income earned during a tax year, minus any applicable deductions. If the comprehensive income has tax withholding agent, the tax could be withheld by monthly or by number of times under the agent. And the tax resident should do the annual tax filing after year-closing.
The new law also adds an anti-tax avoidance clause, thus permitting tax authorities to adjust tax rates when individuals transfer property in violation of independent trading. Individuals evading taxes via overseas tax havens or obtaining improper tax benefits by organizing unlawful commercial activities will also be subject to the clause.
The New IIT Law will be implemented in two phases. Phase 1, including the higher tax threshold of 60 000 yuan per year and broadened access to lower tax brackets will take effect from October 1 of this year.
Details of the tax deductions, such as those for education and elderly care expenses, must still go through revisions and be decided by the State Council, based on the advice of the Ministry of Finance and the State Administration of Taxation. Thus, the effective date of Phase 2 will be January 1, 2019.
The current law has undergone seven revisions since it was enacted in 1980. The current threshold is 3500 yuan according to the revision made in 2011.
Not quite sure how the new tax threshold will affect your salary? Here’s a guide, followed by a simple example calculation to help you navigate through the tax system in China as of October 1st, 2018.
So, for someone gross salary is 18 000 RMB per month, and special deduction is 3 600 RMB (assumed) the steps would be as follows:
18 000 ¥ – 3600 ¥ – 5000 ¥ = 9 400 ¥
9 400 ¥ * 10% – 210 ¥ = 730 ¥
From the above steps, we see that someone earning 18 000 RMB gross per month would pay 730 RMB for tax and end up bringing home 17 270 RMB.
Do you have more questions about the new IIT Law and how it may affect You? Contact us to learn more about the upcoming changes and follow us on social media to receive all the latest updates!
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