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China’s Individual Income Tax: Drastic Changes Being Proposed

October 12, 2018

Preview

A new Draft Amendment regarding Individual Income Tax Reform is currently being proposed to the Standing Committee of the 13th National People’s Congress (NPC). This Amendment encompasses key revisions such as:

  • New criteria for tax residence
  • New tax deduction items
  • Replacement of the current schedular taxation structure
  • Consolidation of certain tax brackets
  • Introduction of anti-tax avoidance rules
  • Unique taxpayer identification number

The Draft Amendment will take full effect on January 1, 2019.  It is crucial to understand what these proposed individual income tax changes are and how they may affect you.

Tax Residency Criteria

Current – Residency equates to 365 documented days, one full taxable year.

Proposed – Residency equates to 183 days, or over one half of a taxable year.

How does this affect you? 

After residing in China for a period of 183 days or longer, you will be considered a taxable individual in China. The current tax laws only take into account locally-paid income as taxable. There is a five-year rule which states after being taxed as a Chinese resident for five consecutive years, your global income will be incorporated into your taxable income. It is unknown how the reforms will affect this rule.

New Deductible Items 

The standard basic deduction in RMB/month has increased.

Current – ¥3,500; Proposed – ¥5,000

New deductible items include:

  • Continued/Dependent Education
  • Housing Costs
  • Major Illness Expenses

Updated Tax System

The current tax system may not be considered equitable across all income sources and income levels. Changing of the current schedular tax system to a mixture of an aggregate and schedular system will attempt to create more economic equality.

Why does this matter to you? 

The sources of your income mentioned in the figure below will be combined into a comprehensive income that is taxed on seven brackets of progressive tax rates. This may increase tax rates for non-traditional forms of income depending on your comprehensive earnings.

Taxable Income Brackets

A new change to the tax rate is an expansion of lower tax rates (3%, 10%, 20%, 25%). Meanwhile, taxable income brackets of higher income levels remain unchanged (30%, 35%, 45%).

What does this mean for you? 

If your major income source is wages and salary, at an especially low and middle- income level, there could be a tax relief. Taxpayers with multiple sources of labor income could receive an increased tax burden, but the expansion of lower tax rates may relieve such cost.

Anti-Tax Avoidance Law 

Knowing these aforementioned changes in the tax laws is paramount to avoiding unwanted legal liabilities as authorities can now hold companies and individuals responsible for tax avoidance.

Prosecutable offenses include: arm’s length transactions, business arrangements utilized through tax havens, and inappropriate tax benefits.

Unique Tax ID Number 

In an attempt to modernize China’s taxation system, each individual will be assigned a unique identifier. The “one taxpayer, one number” policy reflects China’s efforts to improve future taxation reform.

Contact Us for More Information:

Michael Hughes – Assistant GM, China
T. +861861174763
E. mhughes@arpinintl.com

 

Sherry Wang  Global Development Manager
T. +8613788936582
E. swang@arpinintl.com

 

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Disclaimer: This is for informational purposes only and not to be taken as legal advice. Please consult the official China State Administration of Taxation website http://www.chinatax.gov.cn and an attorney with knowledge of China tax law for advice on your situation.

Information Sourced from: http://www.chinatax.gov.cn