Major changes to Chinese income tax will impact expatriates
Foreign companies operating in China will need to take account of income tax changes that will hit their expatriate employees.
The new income tax arrangements, which are effective from 1 September 2011, are aimed at shifting the tax burden from low-income earners to higher-income earners.
Current inflation rates are taking a big bite out of workers’ paychecks, so the changes will come as a welcome relief to mid-level and low-level earners.
The changes are also aimed at ensuring that wealthier taxpayers in China pay their fair share of income tax. The Chinese tax authorities have until now mostly focused on salary income because it is easy to track and easy to collect. They are now turning their attention to high-level earners receiving income from property, trusts, securities and private equities – all of which are more difficult to track. Bonuses and dividends, home sales, consulting work and the like are in a similar category.
Highly paid expatriate workers in China are under scrutiny too. As they tend to be high-wage earners, their tax will certainly increase, and foreign companies that take on this burden, for example through tax equalization schemes, should plan accordingly.
The first major change is an increase in the minimum earnings threshold for income tax liability from 2,000 RMB per month to 3,500 RMB per month for Chinese workers. It remains unclear how this change will affect the current 4,800 RMB threshold for expatriate workers in China.
While this is a step in the right direction for lower-level earners and will no doubt bring relief to those in smaller cities and rural areas throughout China, many believe that the new threshold of 3,500 RMB is not sufficient to help those in larger high-cost cities like Shanghai.
The second main change is to the progressive tax rates scale. Previously, there were nine tax brackets that ranged from 5% to 45%. Under the new rules, those workers with taxable incomes between 1,500 RMB and 4,500 RMB per month benefit, as they are now in the 10% rate bracket. However, workers with monthly taxable incomes higher than 9,000 RMB will see their tax increase as they move into higher brackets. All taxable incomes greater than 80,000 RMB per month will now pay a 45% tax rate, whereas previously that threshold was 100,000 RMB.
For sole traders and those whose income is from contracting or leasing activities, the threshold is increased to 15,000 RMB per year for the 5% bracket and increased to 100,000 RMB per year for the 35% bracket.
This current tax shift still does not address incomes resulting from capital gains and other such earnings. Interestingly, it’s clear that total income tax revenue will drop, since most Chinese workers are low-wage earners.
For further information, contact:
Nexia TS (Shanghai) Co. Ltd
Tel: +0086 21 63906000- 217