Mainland tax overhaul ‘won’t dent talent inflow’
Planned revamp in personal tax laws a burden for high-income group, but no brain drain seen
What’s being expected are possible changes to the Detailed Implementation Rules which, basically, offer more guidance for various categories of taxpayers.”
Allen Tong,
While high-income earners living and working on the Chinese mainland, including expatriates and Hong Kong residents, may fret about one of the most sweeping overhauls planned for the country’s personal tax laws, taxation pundits are convinced it would not precipitate an overseas brain drain.
A bulwark against any potential exodus of talents will be the vast spectrum of opportunities up for grabs as China continues along the path of rapid economic modernization and expansion, particularly in the highly acclaimed innovation and technological fields.
Under a proposed amendment espousing a slew of changes to the country’s Individual Income Tax Law, expected to come into force in January next year, the international taxation practice giving an explicit definition of resident and non-resident individuals would come into play. The length of time used to distinguish between the two groups, without domicile in China, would be reduced from 365 days to 183 days.
The change implies that expatriates who’ve been working on the mainland for more than 183 days in a year would have to pay tax on earnings sourced from both within China and overseas.
“It would put an extra burden on enterprises and organizations, and potentially raise their tax obligations if they send staff to work in China,” explained Tony Jasper — a tax partner at Deloitte China.
However, he believes a dramatic change in the perspective of attracting overseas talents is unlikely as China remains a magnet for expatriates with significant job opportunities.
What makes expatriates rather apprehensive is whether the five-year concession granted under the existing Detailed Implementation Rules (DIRs) will be revised. Janssen Chan, divisional councilor at CPA Australia, Greater China, reckons that the five-year concession would be trimmed following the adoption of the new IIT Law.
“It would be a nightmare if the five-year rule is abolished,” said Danny Po, co-chairman of the Tax Subcommittee at ACCA Hong Kong. “But, if there’s a new IIT Law, then there would be a new set of DIRs.”
Under the existing regulations, foreign individuals who have lived and worked on the mainland for five years or more, instead of 365 days, are subject to worldwide income tax from the sixth year onward.
“What’s being expected are possible changes to the DIRs which, basically, offer more guidance for various categories of taxpayers,” said Allen Tong, tax director at Deloitte China.
Jasper advised his clients to “think what the proposed reform would mean to them, and what process they need to change from a multi-field perspective”.
Hong Kong professionals working on the mainland are neither exempt from the new IIT Law in terms of the 183-day residence rule. With the highly touted Guangdong-Hong Kong-Macao Greater Bay Area — an integrated economic and business hub linking the two special administrative regions and nine cities in the Pearl River Delta — poised to draw talents from Hong Kong and Macao, the taxation issue has been uppermost in their minds.
“If there’s no tax exemption for Hong Kong residents working in the Bay Area, it would be difficult for people moving around,” Chan said.
According to Po, discussions on tax deductions for Hong Kong residents working on the mainland are in progress.
Ken Chu — a National Committee member of the Chinese People’s Political Consultative Conference and chairman of Mission Hills Group — had proposed tax reform by introducing special deductions for Hong Kong and Macao residents working in the Bay Area during the two sessions held earlier this year.
At present, Hong Kong residents who have lived or worked on the mainland for more than 183 days within any 12-month period are subject to IIT.
The IIT is the third major contributor to China’s total tax revenues after value-added tax and enterprise income tax. According to the Ministry of Finance, revenue from IIT reached 812.7 billion yuan ($119 billion) in the first half of 2018 — a 20.3-percent increase over the previous year.
The draft amendment to the IIT Law was submitted for its first reading at a bimonthly session of the National People’s Congress Standing Committee. A public consultation exercise ended late last month.
The IIT public consultation process drew more than 130,000 comments from some 60,000 participants, attracting the most attention compared with three other amendments that were open to public consultation during the same period.
Although the country’s tax rate on individuals’ income, levied progressively from 3 percent to 45 percent, remains unchanged, Chan noted the tax overhaul revised the tax brackets from 3 percent to 25 percent so most of the taxpayers would benefit from a reduction of the overall payable tax.
“What I’ve suggested to my clients is that they should review all their existing compensation packages for expatriates. It’s also a good opportunity to check on those who may have aggressive tax planning or are claiming allowances unreasonably or without a commercial substance to prevent non-compliance risks under the proposed general anti-avoidance provision,” Chan said.
Tong is also positive about the upcoming tax reform. “For some individual taxpayers in China, the challenge they’re facing is even though there’s one set of individual income tax rules that apply across the country, the administration is down to the local authority level, so people keep hearing things like local practice is like this, is like that. Sometimes, it causes confusion and creates inconsistency,” Tong said. “So, now we’re also providing more simplicity to people.”
The proposed IIT Law amendment also calls for the individual income tax threshold to be lifted to 5,000 yuan from 3,500 yuan, effective from Oct 1 this year.
Since 1980, when China’s top legislature set the IIT threshold at 800 yuan per month, there’ve been three major amendments. The last overhaul was in 2011 when the monthly personal allowance threshold was raised to 3,500 yuan from 2,000 yuan.
Besides, the Comprehensive Income category will be applied, which may benefit individuals with a single source of income. The anti-avoidance provision is introduced in the IIT Law to ensure fairness.
The amendment also introduces more tax cuts for residents for expenses on their children’s education, self-education, medical expenses for serious illnesses, housing loan interest and rental housing.