Explaining taxes has always been a challenging topic for those who live and work in China. The reforms made in 2019 concerning the new IIT law resulted in monthly tax variation which may not be easily comprehensible to some.
China’s changing taxable rates lie in the withholding method stipulated by the new law. Moreover, your tax liability also now depends on whether you are a resident or non-resident taxpayer in China. Keep reading to learn more!
What is the difference between resident and non-resident taxpayers?
Foreigners cannot be domiciled unless they reside in China due to household registration, family ties, and economic involvement. In practice, all PRC nationals are treated as tax residents in China unless they immigrate.
If you are a resident taxpayer with no domicile status, you can be exempted from paying worldwide income tax if you have stayed in China for less than six years. On the other hand, if you are a non-resident taxpayer, you can be subjected to worldwide income tax if you have stayed in China after six years without leaving the country for thirty days.
To be exempted from paying worldwide income, you must leave China for 30 consecutive days or more during one calendar year (considered as one tax year) within the six-year period, according to the new six-year rule. If there is a single departure outside Mainland China for 30 days or more, the calculation of six years will restart in the next tax year.
How does the monthly tax rate variation affect the taxpayer’s gross salary?
The new cumulative tax withholding method is one of the major changes in China’s IIT law. According to this method, the monthly IIT deductions will be based on the annual income. This means that domiciled, resident employees will have a higher net salary in the first few months of the tax year and will then be lower towards the end of the year.
Since the new IIT declaration procedure has been implemented from January 2019 and the monthly declaration is now done on a cumulative basis, the monthly net salary and IIT will vary.
The new IIT also showed various changes to individual tax brackets where the lower tax brackets have been expanded, the middle brackets have been narrowed and the higher bracket maintained. This only means that more taxpayers in the lower brackets can have access to lower IIT rates and tax cuts. The table below shows the tax rate changes in China’s IIT.
The monthly tax variation depends on changes in the accumulative income of taxpayers which leads to changes in their tax rates as well. One big factor affecting the accumulative income is the special itemized deductions introduced by the new IIT law.
If a foreign employee decides to apply the special itemized deductions for a certain month, his or her accumulative income will increase, thus, the tax rate also increases.
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