Will the revision of Individual Income Tax Law reduce our tax?

Since the law of the People’s Republic of China on individual income tax law amendment (draft) was published on June 29, 2018, it has since gained a heated social response and people from all walks of life have developed positive discussions. Here, we have chosen several personal related issues to discuss and share with you all.

I. The Cancellation of “Super National Treatment” Policy of Foreign Individuals

The amendment draft stipulates that: “The individual who has residence within the territory of China or has lived for one hundred eighty-three days or more during one tax year within the territory of China is a resident individual and incomes gained within and outside the territory of China by such individual should be paid individual income taxes in accordance with regulations of this law”.

The amendment firstly introduced the concept of the resident individual and the non-resident individual and thus stated that the standard to judge a resident is whether his (her) length of residence within the territory of China arrives at 183 days. The 183-day standard refers to the international convention and the general provision of intergovernmental taxes. In other words, in China,a non-resident tax-payer only needs to pay individual income taxes of incomes gained within the territory of China; but the resident tax-payer needs to pay individual income taxes of incomes gained within and outside the territory of China (within the global scale).

The introduction of this concept mainly influences overseas Chinese with foreign and domestic incomes and also foreign workers in China. In previous provisions, foreign individuals who have lived in China for less than 5 years can gain the tax preference in which their overseas income tax obligations are exempted, and they can avoid the 5-year limitation by leaving China every 4 years, which is a general tax planning method largely adopted by foreign individuals. However, now, foreign workers in China must pay more taxes as, firstly, China’s tax rate is higher than that of the USA and other countries and secondly, the tax rate in China will contain sharply improved conditions after this Amendment.

II. Reform from the “Classified Income Tax System” to “Income Tax System Based on a Combination of Adjusted Gross Income and Specific Types of Income”

For individuals, The amendment raises the monthly tax exemption threshold from 3,500 yuan to 5,000 yuan (RMB 60,000 per year). Besides, the taxable comprehensive incomes include four kinds of labor incomes: salaries and wages, incomes from remuneration for personal service, incomes from author’s remuneration, and royalties. According to the new tax rate of “comprehensive incomes”, comprehensive incomes gained by resident individuals is the balance of the annual incomes every tax year minus the sum of RMB 60,000 as well as special deductions, special additional deductions and other deductions determined in accordance with laws.

For the part of annual incomes which are beyond RMB 300,000, a tax rate of more than 20% applies (the part of annual incomes beyond RMB 960 thousand will be collected with a 45% high tax rate). This amendment actually increases the tax burden of individuals with surplus incomes.

III. Whether Taxes are Reduced

1. The Amendment expands the class interval among the three low tax rates: 3%, 10% and 20% and the tax rate of such income which has a tax rate of 25% originally has descended to 20%; for the wide range of individuals whose main incomes derive from “wages and salaries” and annual incomes (not earnings but the net amount after deducted by the various different deductions) are less than RMB 420 thousand, their tax burden is increased to some extent.

2. However,  for the group whose main income comes from “wages and salaries” and annual income which are more than RMB 420,000, their tax burden in the part of personal incomes beyond RMB 420 thousand is not changed (the progressive tax rate of incomes beyond RMB 420 thousand is the same as before the amendment).

3. For the group whose main income comes from other comprehensive incomes other than that of “wages and salaries” or incomes which include both “wages and salaries” and other comprehensive incomes other than that of “wages and salaries”, the amounts of which attach equal importance in their respective incomes, their personal income tax burden may be largely increased (the highest tax rate is drastically improved).

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