Home Knowledge China China Taxes Individual Income Tax Major Amendments to the China Individual Income Tax Law 2018
Major Amendments to the China Individual Income Tax |
On 31 August 2018, the Chinese Government released newly amended Individual Income Tax Law (new IIT Law). This is the 7th revision to the law since its implementation since 1980. This 7th amendment introduced the concept of comprehensive income and is arguably the largest amendment to the law yet, in terms of the scope and importance of the changes. The new IIT Law is set to take effect on 1 January 2019. |
1. | Introduction of Definition and Determination of Residents and Non-resident | |||||||||||||||||
The new IIT Law introduced the concepts of resident and non-residents for tax purposes and changed the tax residence rule form the existing one-year test to a 183-day test. Table 1- Comparison of categories of taxpayer
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2. | Implementing Comprehensive Taxation on Incomes | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The current IIT Law adopts a schedular income tax system, with 11 categories of income item subject to IIT at different rates. Table 2-Comparison of Categories of Income
The new IIT Law grouped four categories of labor income, including income from salary and wages, income from provision of independent personal services, income from author’s remuneration, and income from royalties, into the scope of “Comprehensive Income,” and one set of progressive tax rates will apply for determining the IIT. Tax residents will be taxed on an annual basis while non-residents will still be taxed on monthly taxable income or as and when taxable income arises. Income from operations, interest income, dividends, income from property leasing, income from the transfer of an asset, incidental income, and other income will still be taxed separately at the rate prescribed for that category of income. Table 3- Comparison of Computation of Taxable Income
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3. | Tax Rate and Brackets for Comprehensive Income | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Currently, salaries and wages are subject to progressive tax rates ranging from 3% to 45%, with seven tax brackets. Table 4- Tax bracket and rate of comprehensive income
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4. | Tax Rates on Income from Operations | |||||||||||||||||||
The tax rates on income from operations are based on the existing tax rates applicable to income from a production or business operation conducted by self-the employed and income from contractual or leasing operations to enterprises and institutions, Income from Operations will still be subject to progressive tax rates ranging from 5 percent to 35 percent with appropriate adjustments to be made to each tax bracket, together with an increase of the lower band for the 35-percent tax bracket from RMB100,000 to RMB500,000. Table 5- Tax Bracket and Rates for Business Operation Income
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5. | Standard Basic Deduction | |||||||||||||
Under the existing IIT Law, the standard basic deduction for income from salaries or wages is RMB3,500 per month, and for income from remuneration of labor service, author's remuneration, royalties, the standard deduction is RMB800 for income less than RMB4,000 and 20% of the income received if the amount of income is more than RMB4,000. Table6- Comparison of Standard Basic Deduction
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6. | Specific Additional Deduction | |
The new IIT Law not only increased the standard basic deduction for comprehensive income and kept those specific deductions, it also introduced specific additional deductions. The existing specific deductions include the contribution of statutory endowment insurance, statutory medical insurance, unemployment insurance, housing fund. The specific additional deductions introduced by the new IIT Law include children’s education expenses, continuing education fees, critical illness medical expenses, housing mortgage interest, rental expense, and elderly care expenses. The detailed rules and regulations for specific additional deductions have yet to be determined by the State Council. |
7. | Tax Assessment, Collection, and Filling | |
Resident taxpayers who received comprehensive income shall be taxed on annual basis. Where there is a withholding agents, the withhold agent shall withhold tax on a monthly basis or at the time an income is received. After the year end, if additional tax to be paid or excessive tax to be refunded, the taxpayer should process tax clearance accordingly. Taxpayers who received comprehensive income and required tax clearance, shall process tax clearance during March 1 to June 30 in the following year. |
8. | Tax Settlement for Immigration | |
According to the new IIT Law, if a taxpayer wishes to deregister his household registration (Hukou) because of immigration, he shall settle his individual income tax before deregistering his household registration. |
9. | Anti-tax Avoidance Clause Added | |||||||
The new IIT Law also added an anti-tax avoidance clause. Under the new IIT Law, where any of the circumstances outlined below applies, the Tax Authority shall be empowered to adjust tax, collect tax underpayments and impose interest surcharge resulting from tax remediation.
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