The revised Individual Income Tax Law of the People’s Republic of China stands to significantly affect workers’ monthly net salaries going forth in 2019. From 1 January, individuals monthly net salaries should have risen from their December salary, as the individual withholding tax calculation has been altered from a monthly taxable basis to annual accumulated income basis (although tax is still withheld on a monthly basis). What’s more, the type of deductions applied to calculate the monthly taxable income has also changed.  

Previously, under the IIT revisions implemented in 2011, the monthly taxable income was calculated after a standard deduction of RMB 3,500 for local employees and RMB 4,800 for foreign individuals working in China (including residents of Hong Kong, Taiwan, and Macau). The basic formulas are as follows:

• Monthly taxable income for foreign individuals = monthly income –  RMB 4,800 for social insurance

• Monthly taxable income for Chinese individuals = monthly income – RMB 3,500 for social insurance

• Tax withheld and prepaid = monthly taxable income x applicable tax rate for a quick deduction

• Monthly taxable income for foreign individuals = monthly income –  RMB 4,800 for social insurance
  
  
• Monthly taxable income for Chinese individuals = monthly income – RMB 3,500 for social insurance
  
  
• Tax withheld and prepaid = monthly taxable income x applicable tax rate for a quick deduction

Under the revised Individual Income Tax Law in 2011, foreigners were also able to claim certain employment benefits as non-taxable income, such as reasonable subsidies for lodging and boarding, relocation, trips home and reimbursement of certain meals, laundry, language training cost and children’s education expenses in China within reason.

The newly revised IIT refers to the taxable income as the balance after the deduction of RMB 60,000 for expenses, special deductions, special additional deductions and other deductions determined by the law from the income amount of each tax year. In other words, tax withheld and prepaid shall be predicated on an annual basis minus provisioned deductions.

Pursuant to the Revised IIT, the Announcement of the State Administration of Taxation on Issuing the Administrative Measures for the Withholding and Declaration of IIT (for Trial Implementation) No. 61 further outlines the taxable income to be calculated under the following the cumulative withholding method.

• Cumulative taxable income = cumulative income – cumulative tax-exempt income – cumulative deductions – cumulative special deductions – cumulative additional special deductions – other cumulative deductions confirmed in accordance with the law

The tax to be withheld and prepaid is also calculated on a cumulative basis and under the following formula:

• Tax to be withheld and prepaid for the current period = (cumulative taxable income withheld and prepaid x withholding rate – quick deduction) – cumulative tax deduction and exemption – cumulative tax withheld and paid

As indicated in the above cumulative taxable income calculation, another significant change is additional deductions added into the calculation of the cumulative taxable income, which plays a crucial role in determining an individual’s monthly net salary.

Tax-exempt income

Tax-exempt income includes the following as provisioned under the Revised IIT Law:

• Awards for achievements in science, education, technology, culture, public health, sports environmental protection, and so forth, granted by provincial people’s governments, ministries and commissions under the State Council, units of the Chinese People’s Liberation Army at or above the corps level, as well as foreign organizations and international organizations; 

• Income from interest on treasury bonds and other financial debentures issued by the State;
  
  
• Subsidies and allowances given under uniform state regulations;
  
  
• Welfare benefits, disability and death compensation, and relief funds;
  
  
• Insurance indemnities;
  
  
• Military severance pay, demobilization pay and decommissioning pay received by members of the armed forces;
  
  
• Settling-in allowance, severance pay, basic pension or retirement pay and full-pay retirement pension plus living allowances (for qualified veteran cadres) given to public servants and workers under uniform state regulations;
  
  
• Income of diplomatic representatives, consular officers and other personnel of foreign embassies and consulates in China, which are exempted from tax pursuant to the provisions of the relevant laws of China;
  
• Tax-exempt income stipulated in international conventions to which the Chinese Government has acceded or in agreements which the Chinese Government has signed; and
  
  
• Other tax-exempt income as stipulated by the State Council.
  
  

Cumulative deductions

Cumulative deductions refer to the up to RMB 60,000 for expenses per tax year, which per month amounts to RMB 5,000. Previously, this was the monthly standard deduction for which Chinese nationals was RMB 3,500 and foreigners RMB 4,800.

Special deductions

Special deductions refer to social contributions, including basic pension insurance, basic medical insurance, unemployment insurance and other social security contributions such as housing provident funds.

Special additional deductions

Special additional deductions refer to expenses for children’s education, continuing education, medical treatment for major illness, home loan interest or house rentals, support for elderly parents and so forth. More detailed information can be found in our previous IIT Special Additional Deduction post.

Other deductions

Other deductions specified, according to the law, include expenses incurred by an individual for the payment of enterprise annuities and occupational annuities in compliance with state regulations; and for the purchase of commercial health insurance and tax-deferred commercial pension insurance in compliance with state regulations and other items that may be deducted as specified by the State Council.

It is important to note that all deductions are calculated on a cumulative basis, while the tax is withheld on a monthly basis. For foreigners, certain employment benefits can be claimed as non-taxable income, such as reasonable subsidies for lodging and boarding, relocation, trips home and reimbursement of certain meals, laundry, language training cost and children’s education expenses in China within reason. However, foreigners may not claim non-taxable deductions and special additionals deductions concurrently. That is to say, foreigners may only choose between deducting non-taxable income items or special additional deductions. What’s more, from 1 January 2022 foreigners may only deduct special additional deductions, while other non-taxable expenses will be phased out.  

Overall, employers and employees should note that an individual’s monthly net salary will vary month by month since the calculation is based on an annual cumulative taxable income. Therefore, the tax withheld and prepaid will be lower at the beginning of the year and continue to increase during the year, while the net monthly salary shall be higher at the beginning of the year and decrease as the year progresses.   

If you would like more information about Individual Income Tax (IIT) in China or other related corporate matters, send us an email at talktous@horizons-advisory.com, and we’ll have a Horizons professional contact you.

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