China Payroll: New Rules for Individual Income Tax
The Chinese government has amended its individual income tax laws - employers must adapt to the new regime...
Amendments to the Individual Income Tax Law of the People’s Republic of China were passed on 31 August 2018. The changes deliver tax relief for low and middle-income earners and the elderly, while creating a more robust regime for higher-earners and foreign employees. Motivating the changes are China’s increasing cost-of-living, the financial consequences of a rapidly ageing population, and the need to respond to economic slowdown and increasing trade friction with the United States.
The Changes
New tax calculation methods came into effect on 1 October, while the remaining amendments will be introduced on 1 January 2019. Since every taxpayer in China is affected (and therefore every employer), payroll departments should already be implementing the necessary compliance requirements.
In order to understand how the changes affect China’s tax system, it’s necessary to first understand the way monthly tax is calculated - which is as follows:
Monthly taxable income x Tax Rate - Quick Deduction
In more detail, the new IIT regime introduces the following changes:
Deductions
Higher standard deduction threshold: Under amended IIT law, the standard deduction applicable to ‘taxable income’ in China has increased from a monthly RMB 3,500 for resident taxpayers (and RMB 4,800 for non-residents) - to RMB 5,000.
Special deduction: A variety of additional ‘special’ deductions to monthly taxable income have been introduced for resident taxpayers - these cover:
- Children’s educational expenses and personal further education expenses
- Housing rent and interest on housing loans
- Costs of healthcare for serious illness
- Elderly support costs
- Housing Loan Interest
- Housing Rent
Charitable deduction: Individual taxpayers can now deduct up to 30% of their monthly taxable income donated to charitable causes.
New Tax Incentives
Under the new regime, certain categories of income receive a discount of 20% before their inclusion in the monthly taxable income calculation. The relevant categories are:
- Labour services
- Royalties
- Author’s remuneration (which also receives a further 30% discount, pre monthly tax calculation)
Those three categories have also been consolidated into China’s progressive income tax system. Previously taxed at a flat 20%, they are now taxed across brackets of 3% to 45%.
Tax Cuts
From 1 October 2018, new monthly tax brackets were introduced - effectively expanding thresholds for lower income levels, and narrowing or leaving unchanged higher income levels. The new levels are as follows:
| Old bracket (RMB) |
New bracket (RMB) |
Income tax rate |
Quick deduction (RMB) |
|---|---|---|---|
| Up to 1,500 |
Up to 3,000 |
3% |
0 |
| 1,500 - 4,500 |
3,000 - 12,000 |
10% |
210 |
| 4,500 - 9,000 |
12,000 - 25,000 |
20% |
1,410 |
| 9,000 to 35,000 |
25,000 - 35,000 |
25% |
2,660 |
| 35,000 - 55,000 |
35,000 - 55,000 |
30% |
4,410 |
| 55,000 - 80,000 |
55,000 - 80,000 |
35% |
7,160 |
| Over 80,000 |
Over 80,000 |
45% |
15,160 |
Expatriate Employees
Replacing the previous 5 year rule, foreign employees will now be considered tax residents, and subject to income tax on their worldwide income, if they reside in China for 183 days.
Shift of Tax Calculation from Monthly to Annual
The tax reform also changes the way the IIT is calculation for China tax residents, shifting from monthly to annual basis. However, individual income tax will still be withheld in advance on a monthly basis.
Making the Transition
The amendments represent a major shift in the way China taxes employees so authorities have also been given greater powers to enforce the law, in particular to target tax avoidance schemes and cases of benefit fraud. Given that some elements of the new system are already in place (and the imminent January introduction of those remaining) it’s vital that employers recalibrate their payroll infrastructure urgently to ensure as little disruption as possible.
To learn more about changes to China’s tax landscape, browse activpayroll’s dedicated China Global Insight Guide...