Tax, Payment and Compensation in China January 31, 2008 PwC Main Topics • PRC Individual Taxation • Social Security Contributions • Reward Practice in China 2 Main Topics • PRC Individual Taxation 3 PRC Individual Taxation ------Tax Payer Individuals who have a domicile or place of abode in China are subject to IIT (Individual Income Tax) on their worldwide income Individuals who do not have a domicile in China are taxed in accordance with their length of residency in China Nonresidents and residents in China for not more than 1 year shall be subject to tax on their China-source income; Residents in China for more than 1 year but less than 5 “full” “consecutive” years are subject to tax on both their China-source income and their foreign- source income borne by Chinese entities or individuals; and Residents in China for five consecutive “full” years or more are subject to tax on their worldwide income. 4 PRC Individual Taxation ------ Special provision under tax treaties • According to various double tax treaties between the PRC and other countries, there is special provision of tax exemption for employment income if the three requirements are all met: - Expatriates stay for a period or periods not exceeding aggregate 183 days in one calendar year or any period of 12 months; - Remuneration is paid by, or on behalf of, the overseas entity; and - Remuneration is not charged back to China entity. • Any of the above three requirements cannot be met (e.g. the cost is charged back to China entity), expatriates will trigger China tax. 5 PRC Individual Taxation ------ Taxable Income • Base salary • Bonus (e.g. sign-on bonus, year-end bonus, performance bonus, etc.) • Allowances (e.g. housing allowance, cost-of-living allowance, transportation allowance, etc.) • Stock option • Social insurance / commercial insurance premium • Other income related to employment in PRC 6 PRC Individual Taxation ------ Tax relief for expatriates • Some types of foreign assignment allowances, if paid in cash are subject to IIT, however, if they are paid under reimbursement arrangement, or paid by company directly to the third parties, they could be exempted from PRC IIT. Such allowances mainly refer to the following: – Reasonable meal and laundry allowance – One-off relocation allowance – Host country housing expenses – Actual language training for expatriate employee and actual children tuition fees – Reasonable home leave allowance • However, there is likely to be scrutiny from the tax bureaux in this regard, thus, certain supporting documents should be kept complete and accurate. 7 PRC Individual Taxation ------- Withholding responsibilities • Tax registration with respective tax authorities is required and the IIT return should be filed on monthly basis; • Local employing entity has tax reporting and withholding responsibility on its expatriate employees’ employment income, including those paid through overseas payroll, on monthly basis, and remitting the IIT due to the tax authorities; • If an expatriate comes to the PRC for a project and has no withholding entity, he/she self shall report his/her IIT; and • Late payment surcharge at daily rate of 0.05%, and penalty will be imposed if failure of compliance. 8 PRC Individual Taxation ------- Annual filing requirements Main content: individuals whose annual income exceeds RMB120,000 are required to file an annual IIT return to the tax authorities by the end of following March; Exception: foreign individuals who do not stay in China for "one full year” are not required to file annual return; and Note: annual filing requires individuals to report all taxable/non-taxable employment/non-employment income (e.g. lease gain, investment income, etc.), which is more comprehensive than monthly IIT filing. 9 PRC Individual Taxation ------ Tax planning possibilities • PRC IIT is fixed at a progressive rate between 5% ~ 45% • Tax Planning mainly lies in threes areas: – Identify the PRC sourced income – Structuring the C&B package so that non-taxable income could be maximised – Sliding down the progressive tax rates 10 Main Topics • Social Security Contributions 11 Social Security Contributions • Under PRC labor law, statutory social benefits mainly include: - Basic Pension - Basic Medical insurance - Unemployment insurance - Housing Fund • Each item is determined at a stipulated percentage of the individual’s monthly average salary of the preceding year subject to cap and floor limits, which are set by reference of 300% / 60% of the city average salary of the previous year 12 Social Security Contributions • The percentage contribution requires for both the employee and employer vary among different cities and are governed by local regulations 13 Employer and Employee Contribution ------ Shanghai Employer Employee Basic Pension 22% 8% Basic medical insurance 12% 2% Unemployment insurance 2% 1% Maternity 0.5% 0 Work-related insurance 0.5% 0 Housing Fund 7% 7% 14 Social Security Contributions • Existing Social Security programs only applicable to PRC nationals though there is regulation requires the resident of Taiwan, Hong Kong and Macao who are employed in China to contribute the statutory social security as normal PRC employees. It appears that local governments did not keep pace well with the central government; • Local China regulations do not support foreign nationals to contribution to pension funds in China and language barriers exclude foreigners from using local medical facilities; and • Most companies provide their expatriates with: - International/local commercial medical insurance plans - Continuation of home country based pension contributions 15 Main Topics • Reward Practice in China 16 Reward Practice in China • In China, normally a local Chinese employee’s total package would consist of Annual Guaranteed Pay, Variable Pay and Benefits Base Salary (i.e. base salary x 12 months) Fixed Allowance Guaranteed Pay (e.g. clothing allowance, meal allowance, transportation allowance, cash allowance etc.) Compensation Fixed bonus (e.g. 13th month salary) Variable Pay (i.e. short term, e.g. annual bonus, commission, etc. and long term incentive, e.g. stock option, etc.) Mandatory Benefits (i.e. pension, housing, medical and unemployment) Benefits Supplementary Benefits (e.g. supplementary housing, supplementary pension, medical, etc.) 17 18 Contact persons Nora Wu – Partner Gertie Chen – Manager PricewaterhouseCoopers PricewaterhouseCoopers 11th Floor, 202 Hu Bin Road 11th Floor, 202 Hu Bin Road Shanghai, 200021 P.R.C. Shanghai, 200021 P.R.C. Tel: +86 21 6123 2517 Tel: +86 21 6123 2628 E-mail: email@example.com E-mail: firstname.lastname@example.org Tore Østebrød – Director PricewaterhouseCoopers P.O. Box 748 Sentrum 0106 Oslo, Norway Tel: +47 9526 0676 E-mail: email@example.com 19 Pwc 20
"Prc Individual Income Tax"