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China tax reform – will assignees be worse off?

  Tax

Earlier in the year we reported that new tax legislation in the USA had the potential to significantly impact the tax liability of assignees. However, the US is not the only large economy to embark upon major fiscal reform in 2018. In what is being heralded as the first tax cut since 2011, a presidential decree released on 31 August confirmed that China has made several amendments to the Individual Income Tax law. Global mobility professionals should therefore be aware of the potential impact on assignees.

What are the key changes facing assignees?

The highlights concern changes to three elements: the standard deduction, tax brackets and the rules governing tax liability. The first two took effect on 1 October, while the tax liability changes (and the rest of the reform) will apply from 1 January 2019.

The standard deduction has increased from CNY 42 000 to CNY 60 000 per annum. This applies to all taxpayers, whereas previously, foreign nationals were able to claim a standard deduction of CNY 57 600. Therefore, while inbound assignees can still claim a higher deduction than before, the expatriate concession has effectively been abolished.

The individual income tax brackets have been revised as follows (all figures in CNY):

Rates
Old brackets
New brackets
3%
0 – 18 000
0 – 36 000
10%
18 000 – 54 000
36 000 – 144 000
20%
54 000 – 108 000
144 000 – 300 000
25%
108 000 – 420 000
300 000 – 420 000
30%
420 000 – 660 000
Unchanged
35%
660 000 – 960 000
Unchanged
45%
Over 960 000
Unchanged

Currently, individuals who maintain a permanent home in China are deemed tax resident and are taxed on worldwide income. Individuals without a permanent home, but present in China for a full year (discounting periods of absence up to certain limits), are also deemed tax resident, although such individuals are not taxed on worldwide income until the sixth year of residence. Instead, they are taxed on China source income for the first five years of residence, although tax liability could be avoided entirely by not being present in China for over 90 days in the tax year. This preferential treatment applies to expatriates (including Hong Kong, Macau and Taiwan nationals) and is sometimes referred to as the ‘Five Year Rule’. 

However, the new legislation could make it harder for inbound assignees to avoid paying tax on worldwide income in China. Individuals who are domiciled in China, or have been present for 183 days or more in a calendar year, will be considered tax resident and taxed on worldwide income. Furthermore, the concept of a non-resident has been introduced for the first time. This is defined as an individual present in China for less than 183 days in the year. Non-residents are required to pay tax on China source income only. This is noteworthy because it closes an existing loophole where individuals could avoid paying any tax by being present in China for 90 days or less in the tax year. 

What are the effects on remuneration packages?

The precise impact of the tax bracket and standard deduction will depend on income level and nationality, but taxpayers can expect a significant drop in their tax liability. The table below illustrates the impact on a local national earning CNY 500 000:

 
Old law
New law
Gross income
500 000
500 000
Standard deduction
42 000
 60 000
Taxable income
458 000
440 000
Tax
104 340
79 080

Here, the tax liability has fallen by CNY 25 260, which is equivalent to just over USD 3 600. The impact increases with income, but levels off at CNY 27 960 (about USD 4 000) for individuals paying the top marginal rate of tax.

The drop will certainly not be as high for inbound assignees, who have seen a smaller standard deduction compared to local nationals. However, the changes to the tax liability rules makes the overall impact much more uncertain. Will the inbound assignee now pay tax on worldwide income, and not just income sourced in China, if present in the country for at least 183 days in the calendar year? Perhaps. It is currently unclear if the ‘Five Year Rule’ still applies, as it is not mentioned in the main legislation. The position is expected to be clarified when the appropriate implementation rules and guidelines are released; this has not yet happened at the time of writing. Therefore, any benefit from the revision to the standard deduction and tax brackets could be negated by a new obligation to pay tax on income earned outside of China. That said, it seems clear that assignees can no longer avoid paying tax in China by limiting their overall stay to 90 days.

Similarly, there is a doubt over how the reform affects the taxation of performance-related bonuses for both inbound and outbound assignees. Under the current law, these are taxed separately to the rest of income. However, they are not mentioned in the new legislation, so it is currently unclear if the preferential treatment will continue. Again, it is hoped that the authorities will issue clear guidelines in the near future.

ECA’s tax calculator and tax reports are scheduled to be updated to reflect this reform, and other relevant changes, in January 2019.

  FIND OUT MORE

Clear and comprehensive tax reports are available for more than 100 countries as part of a subscription to ECA data and can also be bought on demand.

Our Tax Calculator enables you to calculate hypotax at the touch of a button, and is used by our Consultancy & Advisory team to run tax calculations on your behalf.

ECA’s hypothetical tax data is built into our various assignment calculators and cost projections, including our assignment management system, ECAEnterprise.
 

  Please contact us to speak to a member of our team directly.

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