There have been numerous stories over the past few months about China’s new tax law and how it may affect foreigners working in China. Most concerning is the proposed provision that income earned outside of China would need to be reported and taxed. I recently had the chance to interact with a friend of mine in China about the new Individual Income Tax Law that went into effect in China on January 1, 2019. He’s my go-to guy on these matters since he was a tax lawyer in his previous life. To help make sense of it all, I posed three questions to him.
1. Can you give a quick overview for us laypeople of the new tax law and its provisions?
On August 31, 2018, the People's Congress voted and adopted the Amendments to the PRC Individual Income Tax Law (Amended IIT Law).
The new law in quick summary, it:
- reduces the time-presence threshold for a non-resident to constitute a Chinese tax resident
- adjusts taxable income categories, tax brackets, and deduction items
- introduces new anti-avoidance rules
Relevant for people in our community, under the old IIT Law and its implementing rules, a tax resident included both residents and non-residents who stay in China for a "full year." A "full year" meant the person was not absent from China for over 30 days in a single trip or over 90 days in multiple trips during the tax year.
Under the new law, a resident will still be a tax resident. However, the time-presence threshold for a non-resident to constitute a Chinese tax resident is lowered from a "full year" to 183 days.
This change means anyone who stays in China for 183 days or more a year will be treated as a Chinese tax resident and will owe Chinese individual income tax (IIT) on their worldwide global income. Consequently, non-resident expatriates working in China for 183 days or more a year could see their worldwide income taxed in China. The lowered time presence threshold indicated China's incentive to enhance its rights to tax non-resident income.
2. What are the implications for foreign workers in China—those who are not employed by large corporations, but as teachers, small business owners, or in the foreign NGO space?
According to a notice published by the State Administration of Taxation in December 2018, resident taxpayers who spend more than 30 consecutive days outside the country in any given six-year period are exempt from having to declare their global earnings.
Under the old rules, a non-resident tax resident who has not stayed in China for more than five "full years" was exempt from tax on foreign-sourced and foreign-paid income. Thus, in the past, they had to leave the country for 30 days or more every five years to gain the exemption, so the revision gives them 20 percent more time to meet the obligation.
Thus, to avoid becoming a tax resident for global income, one must leave China for at least 30 continuous days within a six-year period. Every time that one must leave for over 30 days, the six-year clock is reset.
3. What steps should individuals and sending organizations take to prepare for the new tax law?
Even now it is unclear how the revised legislation will be applied–including exactly when the 183-day and six-year clocks start ticking.
At the very least, my own organization has recommended that those of us working in China consider being out of the country for thirty continuous days, if possible, in order to start the new system with a clean record. It also recommends that we keep a good record of our travels out of the country in the future, in case the number of days is disputed later.
Finally, as each country’s tax jurisdiction is different as they relate to China in terms of treaties, etc., it is important that each individual consult with their sending organization to determine the most feasible course to follow in terms of tax planning under the new amended law, both for the individual and the organization. I would also recommend that each individual talk with their respective local taxing authorities for guidance as to compliance and filing.
Time to start planning your month out of the country!
Joann Pittman is senior vice president of ChinaSource and editor of ZGBriefs. Prior to joining ChinaSource, Joann spent 28 years working in China, as an English teacher, language student, program director, and cross-cultural trainer for organizations and businesses engaged in China. She has also taught Chinese at the University... View Full Bio
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