CFOs with employees in the country need to plan for new residency rules and ensure compliance.
The most significant reform of China’s individual income tax (IIT) laws in 38 years has numerous implications for foreign workers and the multinational corporations that employ them. Michelle Zhou, a partner at KPMG, presented many of the critical elements of the changes to a group of CFOs at a recent NeuGroup meeting in Shanghai.
Big picture. CFOs—who are responsible for income reporting—need to proactively dig into the details of the changes with tax advisors and coordinate closely with human resources departments to develop retention policies that address the potentially negative financial effects the new rules may have for some employees. These include changes in the treatment of annual bonuses and equity incentives—although not all details have been announced.
Defining residency. High on the list of takeaways is that an individual who lives in China for 183 days or more will now be considered a tax resident, instead of one year under the old rules. This has implications for whether the employee pays tax only on income sourced in China or on all of her worldwide income.
• A new “six-year rule” replaces the old five-year concession rule. Under the old policy, if a foreign worker stayed in China for five consecutive years, her worldwide income would be taxed in China. The new law extends the period to six years, allowing foreign workers in China more time to avoid paying taxes on income sourced overseas.
o Under the new rules, if the person leaves mainland China for more than 30 consecutive days at any point during the six years, the clock to count tax residency will be reset.
Tax-exempt benefits vs. itemized deductions. The new law allows foreign workers to take advantage of several new itemized deductions limited to specified amounts:
• Children’s education.
• Further education.
• Mortgage interest or housing rent
• Medical fees for serious illness.
• Elderly care.
Foreign workers who don’t take the deductions listed above can continue use tax-exempt benefits until the end of 2021 by claiming allowances of a “reasonable amount” for children’s education, language training fees, housing rental, home leave visits, relocation expenses, and meal and laundry expenses. Corporates need to make sure employees are aware of the choice and the pros and cons of their decision.
Greater Bay Area preferential tax policy. To attract highly skilled workers to a number of cities in Guangdong province, China is providing them with the incentive of an effective tax rate of 15% via a tax subsidy. The policy is effective until the end of 2023.
CFO checklist. KPMG identified several areas that fall within the CFO’s purview that require action:
• Review tax budgets and plans for the new IIT system, including interaction with payroll.
• Review compliance and implement robust policies and processes to mitigate risks; prepare for tax audit.
• Review the company’s obligation to employees, offer training on annual tax filing; work with HR on retention.
• Examine how the new rules affect business traveler risks.
