Social Insurance Law Implementation Differences across China

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By Adam Livermore

Oct. 7 – As experienced China-watchers will be aware, the real challenge for the Chinese government comes in implementation of laws. The new Social Insurance Law and the inclusion of foreigners in the country’s social insurance system is no exception. Although the law was promulgated in October 2010 and actually came into effect this past July, most cities have still made no visible progress in transitioning to the new system.

A good example of the confusion that can arise during implementation is Dalian, a popular city for foreign investment in the northeast and one of China’s largest port cities. At the end of August, a document was issued by the local social insurance bureau announcing changes to the system for collection of social insurance from September.

The changes as detailed in the document and its attachments can be summarized as follows:

  1. The social insurance contributions made by employees will not be changed (social insurance contributions will continue to be based on the employee’s average monthly salary over the previous year).
  2. Employers will make contributions based on the company’s entire salary expense for the previous month. In effect, the bases for calculation of contribution from employee and employer (which were previously the same) have been separated – one for the employer and another for the employee.
  3. For the employer portion of the contribution, the ceiling will be temporarily removed. Previously, the upper limit for calculation of contributions was RMB11,154 and therefore the maximum contribution by the employer on behalf of any one employee was limited to RMB3,491 per month (RMB11,154 * 31.3 percent). Companies now have an extra burden for all employees who earn more than this amount monthly.
  4. The definition of the company’s “entire salary expense” is specified in a document issued by Liaoning Province in 2008. This document states that the company should include the salaries of foreign employees into the calculation. What this effectively means is that although foreign individuals are not currently required to make any contributions, their employers must pay 31.3 percent on top of the entire salary they pay to the foreign staff as social insurance premiums.

Therefore, following the regulation strictly, we can conclude that for companies based in Dalian the ceiling for company contributions has been abandoned (at least temporarily), and at the same time companies are also required to contribute to the social security system on behalf of their foreign employees (at a rate of 31.3 percent of the entire salary paid to them). It is potentially a considerable extra burden for companies based in the city that either employ highly-skilled Chinese employees, foreign employees, or both.

Despite what is written in the official documentation, at the time of writing there is some confusion over whether the Dalian government really intends to include foreigners into the social insurance net at this current stage. Staff working at the social insurance bureau are replying verbally to enquiries on this matter by advising companies not to include the salary paid to foreigners in the filings made for September, but nothing has been issued in writing to support this stance at the moment.

If other cities follow the example of Dalian by removing the ceiling on company contributions and requiring company contributions for foreign employees as well, the cost of employing highly skilled Chinese or foreign employees all over China is going to increase substantially. Companies in cities like Beijing and Shanghai where wages are highest would be hardest hit. On the other hand, if most Chinese cities keep their ceilings on contributions in place, companies based in cities like Dalian that remove the caps will be severely disadvantaged. Investors will be dissuaded from investing in such cities, and even big employers already based in such cities will start reconsidering their development strategies.

Interestingly, the Dalian regulation stressed that the removal of the cap was a temporary measure, allowing the government flexibility to re-instate the ceiling at some point in the future.

Apart from Dalian, there are some other cities (Hangzhou is one good example) that have been implementing a similar “entire salary expense” concept for collection of social insurance for some time now. Hangzhou has however retained the cap of 300 percent of average social salary – effectively the “entire salary expense” is amended to reflect the cap amount for employees earning a high salary. Neither are contributions required by the company for their foreign staff. In contrast, there are some cities that are showing no signs of moving to the new model just yet.

In fact, when staff from Dezan Shira & Associates carried out a survey in preparation for these new changes (a full ten months after promulgation of the new law and two months after the law actually became effective), some of the social insurance office employees were apparently not aware of any impending changes. A standard answer that we received was that the local social insurance bureaus only accept instructions from the local authority that directly manages them, and until they receive such a directive they cannot comment on any potential future changes. Many local governments have not released any such directives yet.

The above examples demonstrate the extent of the challenge facing the central government as it tries to impose its will on the various local governments, each of which is keen to maintain as much flexibility as possible and would like their city to remain an attractive place for businesses to invest. The administration of a country’s social welfare system is one of the core roles for a government to fulfill, but the sheer size of China in terms of geographic area and population is going to make it extremely hard to implement.

Content for this article was taken from the October issue of China Briefing magazine, titled “China’s Social Insurance Law.” In the issue, we summarize some of the key points in the newly implemented Social Insurance Law, which covers a great deal more than just incorporating foreigners into the system. We explain the costs and benefits of participation by foreign employees to both companies and individuals as well as take a look at some of the trends across the country relating to the implementation of the law. A PDF download of the magazine can be downloaded on the Asia Briefing Bookstore.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China, Hong Kong, Vietnam and India. For further information and clarification on Dalian’s new social insurance policies or on China’s new Social Insurance Law, please email payroll@dezshira.com.

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