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Proposed IIT Reform

JanJal (580 posts) • 0

Some new information:

"1. The ‘Five-year Rule’ will remain for expatriates, but with two changes

Expatriates will continue to benefit from the ‘Five-year Rule’, but there are two important changes: one, taxpayers that stay in China for more than 183 days for each year can only ‘break’ the five year period by leaving the country for 30 or more days in a single trip; two, expatriates need to file with their tax bureau in advance to enjoy the benefits of the five-year rule.

2. Expatriates will remain eligible for most of their current tax-exempt benefits

Expatriates will retain some of the tax-exempt benefits they currently partly enjoy; however, they will not be able to claim exemptions for items such as housing rent, children’s education, or language training while also claiming a deduction for the same item."

Sources:

www.dezshira.com/[...]

This article and information is based on following drafts that are currently under public consultation:

Implementation Regulations for the Individual Income Tax Law of the People’s Republic of China (Exposure Draft) and the Interim Measures for Itemized Additional Deductions for Individual Income Tax (Exposure Draft), both released on October 20, 2018.

Ishmael (63 posts) • 0

JanJal: I assume the above, especially about the 183 days per year etc., has no effect on expats staying here (with, for example, tourist visas) who are not employed?

Geezer (1846 posts) • 0

@JanJal: Thanks. This information is interesting. Thus far I have not seen any official documentation, nor have I seen any CPA firms clarify the five year rule.

Full disclosure: I have history with Dezan Shira and several years ago had some disagreement with the information they were publishing. At the time they had no lawyers, no Certified or Chartered accountants on staff but opined on law and accountancy. Be cautious using their information. That said, they appear to have grown substantially over the years and hopefully are better these days.

You can find the "BIO" of the founding partner here: www.dezshira.com/personnel/chris-devonshire-ellis.html

JanJal (580 posts) • 0

@Geezer: "Thus far I have not seen any official documentation"

That's because it's not yet implemented (also title of the thread - "proposed").

The current status in China's regulating path is that the drafts are submitted for public consultation, eg. being reviewed by (hopefully) experts, before being written into law. And that could happen sometime next year at the earliest.

No official, or final, documentation exists in any language yet, nor do any organization have to follow laws that do not yet exist.

@Ishmael: "has no effect on expats staying here (with, for example, tourist visas) who are not employed".

If such person manages to live in China without breaking the 5 year rule, then China will have legal basis to claim tax in worldwide income of said person.

This five-year rule (current and future) is specifically about foreign income, that does not relate to work or employment in China - such income would be taxable in China anyway.

Geezer (1846 posts) • +2

@JanJal:

1) As I would tell my Accounting students: Accounting and taxes are not about numbers but are about words, concepts, regulations, rules, laws, conventions and language. Accounting is not about numbers.

2) On August 31, 2018, the Amendment to the Individual Income Tax Law ("Individual Income Tax - IIT") was officially approved. Some of the regulations will be implemented from October 1, 2018 and the whole amendments will be implemented from January 1, 2019.

3) The officially approved Amendment does not address the "five-year rule." This has a serious impact the taxation of expats who live in China. The "five-year rule" provided expats a legal path to avoid paying China IIT on income sourced outside of China and completely unrelated to China.

4) Do not conflate the China IIT scheme, reformed, revised and approved, and the revised nexus the elimination of the "five-year rule" presents. There is a difference and, as best I can tell not holding a China license to advise or prepare IIT tax returns, the loss of the "five-year rule" creates a potentially huge impact on expats with income sourced outside China.

5) In the past, retirement income was not taxed. From Dezan Shira’s “China Briefing” January / February 2005: “Moreover, the tax bureau does also confirm that Foreign income derived from company or Government pension, is NOT taxable income in China.”

***Be aware, each Tax Bureau can, or could, make decisions independently from SAT and there was, in the past, a lack of consistency.

I cannot find a current, definitive answer for foreign sourced retirement income. I did find this (quoted with English errors, no corrections, see 1) above) September 07, 2018:

“For China tax resident, Currently the IIT law did not clearly state whether the pension abroad should be taxed in China.We’re hoping the upcoming release of the detailed IIT regulation will have a more detailed explanation on that.
For non-China tax resident , we would need to judge the situation according to the tax treaty signed with China – in most cases, for non-China tax residents, the pension would not need to be taxed in China.
As for your last question – there is no additional tax relief for pensioners, meaning Chinese retirees are not taxed”

www.sjgrand.cn/china-revised-individual-income-tax-law-2018/

6) This statement, aside from being unclear who is making it, is incorrect:

@Ishmael: "has no effect on expats staying here (with, for example, tourist visas) who are not employed".

In fact, the "five-year rule" specifically targets “expats staying” in China in order tax them even if they are “not employed.”

7) This statement is incorrect:

If such person manages to live in China without breaking the 5 year rule, then China will have legal basis to claim tax in worldwide income of said person.

The "five-year rule" is not a rule to be “broken.” It is an IF, Then, OR rule. Although it may no longer exist, "five-year rule" it was: IF an expat lived in China for five years, THEN China IIT tax must be paid on worldwide income beginning in year six, OR, the expat could spend at least 30 consecutive days outside China to reset the “five-year” period to avoid taxation on worldwide income.

The concept of a “legal basis to claim tax” tax is amusing. Tax laws, and regulations, stand as the basis to tax. They are the law.

8) Tax treaties, if any, between China and your home country also affect treatment of income sourced outside of China.

9) Sorry to be pedantic but these tax laws must be understood and followed. I am no expert on China’s IIT. The "five-year rule" affected me personally hence my interest. Each individual has his or her own set of facts which determines how he or she will be taxed. I offer only information and caution.

JanJal (580 posts) • 0

Naturally when I wrote "breaking the 5 year rule", I meant resetting the condition by leaving the country for substantial enough period.

You are right about being pedantic on the matter though, in this thread.

That said, I believe that to be in conflict with the laws being understood - that may apply to professionals working in this fields and teaching it to others, or their customers, but not to those who have to follow them despite working in completely different fields.

Take random English teacher considering a few years stay in China. He's not going to understand pedantic law texts.

"concept of a “legal basis to claim tax” tax is amusing. Tax laws, and regulations, stand as the basis to tax. They are the law."

Only if you assume that the tax authorities always follow the laws.

For exampe this very specific five year rule as it has stood until now - I'm fairly sure that there are foreign individuals residing in China with condition to be taxable on their worldwide income, yet China's tax authorities do not exercise that right.

When I referred to "legal basis to claim tax", I meant that. They have the right, but they may not exercise it.

This may relate to other scenario that I have heard in China.

Some foreign employees have said that their employers force them to leave the country before the 5 years is up, and I have found no other explanation than the local tax authorities (in co-operation with the employers), not wanting to get to the paperwork to claim taxes for the employee's foreign income. Easier for them to force the employee on an unpaid sabbatical.

Geezer (1846 posts) • 0

@ JanJal: Nearly 50 years ago I took my first course in Taxation. First class, the professor wrote his name on the board then turned and announced, “Taxation is logical.” Perhaps he should have said, “There is a logic to taxation.”

I repeat: “1) As I would tell my Accounting students: Accounting and taxes are not about numbers but are about words, concepts, regulations, rules, laws, conventions and language. Accounting is not about numbers.”

Taxation is an element of state coercion. While on the face of it the purpose of taxation is to raise money for the state to use, it is also a means of coercing behavior to achieve the ends the state desires. In order to tax effectively, the state needs systems to monitor people and enterprises and apply its power to effect collection. This is the foundation of state taxation and can be considered universal regardless of ideology, political system or social system. In this foundation we begin to understand the logic of taxation.

Included in taxation logic are the words of Benjamin Franklin, “In this world nothing can be said to be certain, except death and taxes.”

There was once a day when an English teacher came to China, worked and was unconcerned with taxes. Her agent for calculating, collecting, reporting and remitting taxes was her employer.

“Take random English teacher considering a few years stay in China. He's not going to understand pedantic law texts.”

Ignorance may be bliss but the state wants it tax money. As the sophistication of China’s monitoring and information collection of people, especially expats, improves, not understanding tax law is no excuse when caught.

“Only if you assume that the tax authorities always follow the laws.”

A Tax Bureau is, as its name implies, bureaucratic in nature and has the mission to collect taxes. If you understood how your taxes get from your pocket through the system to Beijing, you would realize a) how foolish, and b) how risky this assumption this statement is. Quite simply, the Tax Bureau gets the first slice of you tax pie and passes what is left up the government chain.

In practice, each tax remittance, calculated and documented by the employer, is recalculated by the tax bureau. Any under collection is collected from the employer. Any over collection is retained and the correct amount is forwarded up the chain. The major effort is borne by the employer.

Why would you even think Tax Bureaus would forgo collecting taxes? Especially taxes from rich foreigners?

JanJal (580 posts) • 0

For the record, the first 6 years that I was in China, I was employed abroad and working remotely from my home in China.

Me or my employer had no sales, business or income in China, and my "working in China" was limited to the concept of sitting physically in my home in China, instead of some other country.

I had no local employer who would have neither adviced about or collected my taxes.

Also my employer was in a third country, and my home country does not tax this kind of income, so I had no tax obligations anywhere - except perhaps to China, if I had not reset the 5-year condition.

Regardless, for a few years I did pay my taxes in China as courtesy rather than legal obligation. Since I had no employer here, I visited tax bureau personally on annual basis and paid what I myself declared as foreign income.

Your commentary above implies situation where there is employer who would calculate and claim the taxes from your salary on your behalf, and submit them to local tax bureau.

But the whole point of the 5-year rule is to get to tax your foreign income, ie. something that your Chinese employer (if you had such), or Chinese tax authorities, will know nothing about - same as in my case.

Even if you have an employer abroad from which you get that foreign income (rather than for example pension or rental income), they also will be ignorant to China's tax regulations, and are under no obligation to adhere to such.

It is sole responsibility of the individual himself to declare his or her foreign income in that case. Perhaps the only entity in China who could enforce the person to do that, are immigration authorities - and even they cannot confirm whether your declaration is true or not.

This is part of the issue why some tax bureaus in China seemingly prefer foreign employees to leave China before the 5 years is up. It would be extra work for them to get to tax income that they cannot confirm in any way.

There are also other considerations. If you do have considerable foreign income in USD or whatever currency, and then you have to pay taxes for that to China. Do you remit and pay the tax in USD to China's tax bureau (can they handle that?), or exchange to RMB first? What about China's foreign exchange regulations? It's a whole lot of issues to deal with, some of which would conflict with other laws of China, like the annual forex limit on individuals.

Since there is no employer who could be obliged to do all that paperwork, you'd have to assume the foreign individual to do it personally.

Few Chinese tax bureaus beyond first tier cities even have English speaking staff. But they do occassionally have the common sense to not try taking the foreigner's money with broken English or elementary Chinese. As in many other fields in China, officials may rather do nothing than risk making a mistake.

Geezer (1846 posts) • 0

@JanJal Here a google translation of the IIT amendment:

Article 1 An individual who has a residence in China or has no residence and who has lived in China for a total of 183 days in a tax year is an individual. Income earned by individual residents from within and outside China shall be subject to personal income tax in accordance with the provisions of this Law.

www.npc.gov.cn/npc/lfzt/rlyw/2018-09/05/content_2060813.htm

It remains that you owe income tax and must self-report regardless of what the tax bureau does. Being a foreigner is no protection intended or unintended.

JanJal (580 posts) • 0

Yes, under this new amendment (and this text alone) my past arrangement would have made my foreign income taxable in China. I believe so it would have been under old regulation.

But so would many other kind of foreign income, and hence the 5-year rule specific to foreigners, for which (in light of this new IIT amendment) we are waiting for the final decisions.

Previously it was the 5-year rule, which was a protection (if you will) solely for foreigners.

However since last year (and for the time being), I have registered a company in China, and my foreign income is channeled through that. For which I pay IIT on my part of the revenue.

But if situation in China or globally changes, I like to be in the know about my options - still have 20+ years career left.

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