China’s IIT Reform: Seven Key Points from the Draft Implementation Rules

Many taxpayers in China have had questions about how the government would change the individual income tax (IIT) law since the amendment was passed earlier this year. Recently, however, the tax authorities released a draft of the amendment’s implementation rules and measures for comment.

While the draft implementation rules and measures are currently under public consultation until November 4, 2018, tax advisors at Dezan Shira & Associates do not expect significant changes to the rules and measures following the consultation period.

China’s IIT reform: What are experts saying
“The draft implementation rules and measures should remove a lot of question marks for taxpayers with respect to how the new IIT laws should be applied in China”, said Paul Dwyer, who leads the International Tax and Transfer Pricing practice at Dezan Shira & Associates. Importantly, the draft rules and measures address many issues that have been unclear to date.

Dwyer told China Briefing, “The changes are profound and will impact expats as well as Chinese nationals”. Dwyer further warned that expatriates and their employers need to look alive: “the authorities are likely going to be ramping up their IIT scrutiny – especially for senior expatriate management or companies employing a number of expatriates”.

But before you begin reading the 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), which were both released on October 20, 2018 by the Ministry of Finance and the State Administration of Taxation, please review the below key points.

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.

3. Expatriates’ domicile assessment criteria will remain unchanged
Tax authorities will continue to assess expatriates domicile based on their household registration, family ties, or economic ties.

4. High net-worth tax payers have new general anti-avoidance rule compliances
Taxpayers that have a high net-worth need to review new rules for related-party transactions and controlled foreign corporation under China’s general anti-avoidance rule (GAAR); tax authorities now have a statutory basis to investigate and impose tax liabilities for the individual tax avoidance cases.

5. Overseas emigrants need to file prior to cancelling household registration
Residents of China that plan to emigrate need to file all necessary taxes for the year of departure, disclose any previous underpayment, and obtain tax clearance before canceling their household registration or ‘hukou’.

6. Resident taxpayers have new documentation requirements
Resident taxpayers will now need to submit information for itemized deduction claims to their tax withholding agent or tax bureau – and authorities will hold taxpayers responsible for the accuracy of their documentation.

7. No clarity on tax treatment of severance pay as of yet
Professionals used to be able to enjoy any severance pay tax free, if it was not more than three times the average wage in their city of residence; however, the Draft offers no clarity on whether the authorities will retain this tax treatment for severance pay.