Following the official publication and enactment of the Amendment to the Individual Income Tax Law ("Amendment"; please refer to China Frontline Employment Law Update October 2018 for details), a number of supporting rules to the Amendment, such as the newly revised Implementation Rules of the Individual Income Tax Law (“Implementation Rules”), the Additional Special Deduction Rules, and the Notice on the Convergence of Preferential Policies after the Revision of the Individual Income Tax Law (“Notice”), were promulgated and came into force in instalments towards the end of 2018. Most of the uncertain matters that had been addressed, but not resolved, by the Amendment have been clarified by the supporting rules.
Now that the new individual income tax ("IIT") law regime, established by the Amendment and its supporting rules, has been in place for approximately three months, its implications are becoming progressively clearer. This Newsletter is drafted from a practical perspective, to help identify the key implications and corresponding action points for HR professionals to ensure a soft landing for both employers and employees under the new IIT law regime.
The Amendment allows for several specific additional deductions to be made before tax, for the costs of education, medical treatment, elderly care, housing rent and mortgage interest. The newly issued Additional Special Deduction Rules and interim handling measures provide a clear scope and standards for the deduction and processing requirements.
To benefit from additional special deductions, the employee can either submit the relevant deduction supporting documents to its withholding agent (normally their employer) for the deduction to be made, or they can submit an annual settlement declaration to the tax authority between 1 March and 30 June in the following year. Where the employee requests his or her employer to make the deduction and provides the relevant deduction information, the employer should not refuse such requests. In addition, not only the employee, but the employer is also legally required to retain supporting documents (if any) for additional special deductions.
The interim handling measure also stipulates that if the employer notices that the submitted deduction information is inconsistent with the actual situation, it has the right to request the employee to correct the information. Where such requests are refused, the employer must report this situation to the local tax authority.
The new IIT law introduced a new annual and cumulative withholding method, which requires IIT to be calculated according to annual salary. This is a significant change from the previous taxation method where IIT was levied on the salary actually paid each month. As a result, employers face increasing complexities with monthly filing which may place a greater administrative burden on some companies.
However, it is the employee that bears the obligation to make clear deduction claims and provide true and accurate information to the employer. If the employee does not make such claims, or fails to provide deduction information, the employer will not bear any responsibility for any subsequent damage or ramifications suffered by the employee.
Under the Amendment and the Additional Special Deduction Rules, the employees themselves are responsible for the authenticity, accuracy and completion of the submitted information. If an employee is found to have fraudulently provided false information in tax returns, they may face penalties from the relevant authority, and their personal credit rating will be impacted, which may lead to further joint punishments from multiple government authorities. For employers, IIT compliance will be factored into their credit information system as well, and the employer may also face incentives or punishment from multiple government authorities based on their credit records.
Pursuant to the Notice, the preferential tax rate for the one-time year-end bonus will remain unchanged until the end of 2021, which means the tax burden will become heavier for taxpayers who receive big annual bonuses or rely on their annual bonus as a major income source from 2022 onwards.
Meanwhile, the Notice also stipulates that after the end of 2021, the previous deductions policy for foreign nationals regarding reimbursement of housing allowance, language training fees and children's education fees will be cancelled, with new deduction rules to be introduced. Although the new rules have not been published yet, it is speculated that the scope and standards of such rules may be similar to those in the new Additional Special Deduction Rules. If so, some foreign employees will face a heavy tax burden if their remuneration structure remains unchanged.
It appears that the new IIT law regime will deliver tax relief for low and middle-income earners, while creating a more robust regime for higher-earners. For companies that employ high earners, it may be worth considering ways of optimising remuneration structures, to save IIT for foreign employees and employees who receive large year-end bonuses, before the end of 2021.
Jun 02 2023
Jun 01 2023