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New Individual Income Tax System in CHINA

China to Launch New Individual Income Tax System

China’s five-year rule for foreigners will soon be cancelled, following this news, many foreigners in China were concerned. At the 13th National People’s Congress Standing Committee held in August, the draft amendments of China’s Individual Income Tax (IIT) system were considered. Below is a summary of the discussions. The Draft amendments will come into total effect on January 1, 2019.
However, the amendments of Tax Bracket for IIT on Taxable Comprehensive Income and Tax Bracket for IIT on Taxable Income of Operations will take effect from October 1, 2018.

The personal income tax threshold must be maintained at 5,000 yuan monthly in the draft amendments to the Personal Income Tax Law. One of the modifications to the draft amendments is that the subsidy given to parents has been added to special deductions, which already include medical costs, housing rents, children’s education and interest of housing loans.

Further details on China new individual Income tax laws

  1.  Tax residence rule – the draft has adopted concepts from international practice, such as resident taxpayers and non-resident taxpayers for the purposes of tax. It also aims to change China’s personal tax residence rule to a 183-day test from the current 1-year testing.
  2. Consolidating Income with Similar Nature for Taxation –Four categories of labour income were grouped together, as well as income from salaries/wages, income from provision of independent personal services, income from author’s remuneration, and income from royalties, into the scope of Comprehensive Income. One set of advanced tax rates will apply for determining the IIT. Resident taxpayers will only be paying tax once a year while non-resident taxpayers will pay on a monthly basis.
    3. Adjusting Income Tax Brackets – The formula used to calculate the individual’s payable tax is: Tax payable = Monthly taxable income × Applicable tax rate – Quick calculation deduction.
    The formulas for calculating an individual’s monthly taxable income is: Monthly taxable income = Monthly income – personal income tax threshold – special tax deduction
    4. Raising Personal Deduction on Comprehensive Income – Personal income tax threshold will be raised by RMB 60 000 annually for Chinese nationals and approximately 5000 for foreign individuals. If this system is introduced, the personal deduction system will apply to all people and the personal deduction fore foreigners will fall away.
    5. Allowing Itemized Deductions for Specific Expenditures – Special tax deduction is only applicable for resident taxpayers under the new system. Except the current deductibles such as basic pension insurance, basic medical insurance, unemployment insurance, and housing fund, the draft has made room for additional deductions which are closer related to people’s lives.
    6. General Anti-avoidance Rule – The anti-avoidance rules are featured in many country’s tax legislations. China has already given the go-ahead on anti-tax avoidance agreements in 103 countries. Since the implementation of the Common Reporting Standards (CRS), China has settled on mutual Competent Authority Agreements and activated mutual exchange relationships with 76 countries and authorities. China had its first tax information exchange with other jurisdictions on September 1 this year. The introduction of an anti-avoidance rule for individual income tax is a sure sign that China’s approach toward compliance and utilizing the automatic exchange of financial account information under CRS to increase enforcement of IIT obligations is ever-evolving and changing.

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