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China plans Personal Tax reform

On June 19, 2018 the draft amendment to the Individual Income Tax Law has been submitted to the National People’s Congress Standing Committee for reviewing.

In order to achieve a better income distribution, reduce the tax burdens for taxpayers and increase the consumption expenses, the draft amendment includes significant changes to the current IIT law:

  • the minimum threshold for personal income tax will be raised from 3,500 CNY to 5,000 CNY per month, applicable also to non-residents receiving an income in China and to those living in China but receiving income from overseas employers;

  • income from salaries and wages will be consolidated with income from provision of independent personal services, income from author’s remuneration and income from royalties, into the “Comprehensive Income”. Taxpayers will be taxed on an annual basis, if resident, or on a monthly basis if non-resident. Moreover the tax rates will be revised, widening the tax brackets for tax rates 3%, 10% and 20%, narrowing the tax bracket for tax rate 25% and maintaining the brackets for tax rates 30%, 35% and 45%;

  • income from the production or business operation conducted by self-employed will be considered as “Income from operations” and taxed according to the existing tax rates of 5%, 10%, 20%, 30% and 35%. The brackets for each tax rates will be adjusted, while the lower band for the 35% tax bracket will be increased from the current 100,000 CNY to 500,000 CNY.

  • special expenses will be allowed for deduction, as children’s education, continuing education, treatment for serious diseases and housing loan interest and rent;

  • the length of time used to distinguish between resident individuals and non-resident individuals will be adjusted to 183 days from the previous 365;

  • anti-tax avoidance rules that empowers tax authorities to adjust tax rates and arrangements in case of violation, evasion and improper tax benefit

The amendment may greatly affect the definition of tax residency, since it may introduce a new personal tax residence rule, from 365 to 183 days, even if at the present time it is still unclear how this new rule will apply.

Currently, according to the Art. 1 of the Individual Income Tax Law, an individual is considered resident in China for IIT purpose if he has lived in China for one full year or more. In this case the individual is subject to tax on his China – sourced income plus any non China – sourced income paid by individual or enterprise located in China. Moreover, individuals who have lived in China for more than five full consecutive years are subject to tax on their worldwide income. The five-year period of residence can be broken and the taxation on the worldwide income prevented if the individual leaves China for a certain period, referred to as “tax break”; this period can be an aggregate of 91 days or more during a year or a single period of at least 31 days.

If the new residence test is applied annually, the foreigner workers may be subject to China tax on their worldwide income starting from their first year of tax residence; if the five-year concession still remains, it may be more difficult to be in compliance with tax break rules, since an absence of 183 days may be required.

The individual income tax collected by State Administration of Taxation and its local branches accounted for 8.3% of the total tax revenue in 2017, amounting to 1.2 trillion CNY and any amendment that may be approved would bring benefits to the chinese internal market and boost the consumptions.

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