China: Domestic Taxation
Permanent residents are subject to tax on their world-wide income. Non-residents and residents who have not yet become permanent (the first five years of residence) pay tax on their China-source income; but the residence qualifications are a bit hazy, especially for people of Chinese origin.
Income is defined very broadly, but excludes interest on bank deposits. There are personal allowances, which are higher for foreign individuals. Tax rates vary from 5% to a maximum of 45% on monthly earned income over RMB80,000. There is capital gains tax of 20%, and the same rate applies to many types of unearned income. Employers operate a 'PAYE' withholding tax system for tax on salaries and social security contributions, which bear more heavily on employers (20% of payroll) than on employees (7%).
Withholding tax of 10% applies to dividends, interest, royalties and capital gains.
In April, 2010, the Chinese Ministry of Finance said it was studying the possibility of a new payroll tax for social security to replenish presently under-funded pension accounts and even out other inequities of the present system.
Finance Minister Xie Xuren was quoted as saying that this was part of a general income tax reform to 'ensure better income distribution', but a survey by China National Radio showed that more than 70% of those who responded opposed the new tax.
Since then, commentators have been at pains to explain that the new tax would not increase the overall tax burden, but provide a broader basis for funding pensions and other social programmes.
Presently the state, enterprises and individuals each pay a "social security fee" into a social security fund to finance China's social security programs - including pension insurance, basic medical insurance and unemployment insurance. The funds are administered through provincial budgets, leading to problems as a result of uneven regional development and migration.
The proposed new social security tax would introduce standard country-wide compulsory contributions and be solely administered by the central government. This would ensure standardized benefits and solve the problem of funding migrants and the wealth gap between different regions.
It was also suggested that tax collection agencies could collect the money more efficiently than the present social security agencies, whose resources are over-stretched.
In September, 2010, the European Union Chamber of Commerce in China (EUCCC) said that many Foreign Invested Enterprises (FIEs) were experiencing problems obtaining clearance from local bureaus of the State Administration of Foreign Exchange or banks, for reimbursement of expatriate expenses in foreign currency to foreign affiliates, which initially paid the employee expenses.
According to the EUCCC, there is no state-level foreign exchange regulation clarifying that a Chinese company employing a foreigner may reimburse expenses, unless the Chinese company has been recognized as a Multi-National Corporation (MNC) and the conditions for being recognized as an MNC are very stringent.
In the present situation, due to Chinese foreign exchange control, the EUCCC says foreign companies may not be able to charge back employment costs for employees who are expatriated or seconded to work for their Chinese affiliate companies.
When the reimbursement can not be made, the EUCCC maintains this often generates a tax burden in the foreign company's home country where such expenses may not be deductible. Alternatively, when the reimbursement is effected, a tax burden may occur in China for the foreign company as a result of taxation of the re-invoiced expenses, even though it does not make any profit in this respect.
Tax authorities, say the EUCCC, frequently refuse to issue a tax clearance or exemption certificate, unless Enterprise Income Tax (EIT) and Business Tax (BT) are paid on the reimbursement of expenses. Moreover, an additional tax burden arises for the Chinese affiliate which cannot deduct social security expenses borne by the employer. The EUCCC says foreign employees are also penalized as all or part of their social security contributions should be included in their Individual Income Tax (IIT) base.
These restrictions put an undue burden on foreign groups and FIEs doing business in China as well as foreign individuals, amounting to discrimination against the employment of foreigners in China, as employment of Chinese nationals is not subject to the same constraints, says the EUCCC.
The EUCCC recommends:
- The issuance of state-level foreign exchange regulations allowing Chinese companies to reimburse employee expenses paid by foreign affiliates and related to foreign employees working for Chinese affiliated companies;
- The clarification that foreign companies are not liable to EIT and BT on employee expenses charged back without any margin or profit to their Chinese affiliates and corresponding to foreign employees working for the said Chinese affiliates;
- Permission for deduction from the EIT base of social security expenses borne by the employer for foreign employees, irrespective of their nature (i.e. including mandatory and voluntary contributions as well as commercial insurance premiums);
- Exemption of social security contributions from IIT for foreigners working in China, irrespective of their nature (i.e. including mandatory and voluntary contributions as well as commercial insurance premiums) and irrespective of whether such contributions are paid by the employer or the employee.