Case Study: Individual Income Tax Compliance

Scenario

A multinational manufacturing company who had a subsidiary in China sent a group of professionals from foreign countries to direct and oversee the implementation of projects being handled in China. The company’s Chinese subsidiary had thus been making payments (service fees) to the client company for a number of years, which was later noticed and challenged by the Chinese tax bureau. Though all business relevant taxes (i.e., value-added tax, business tax, and other surcharge fees) had been withheld from such payments to cover the corporate income tax (CIT) burden for the overseas group company, no consideration had been given to the individual income tax (IIT) liabilities relating to these employees. Given the fact that these staff members were highly paid professionals, the IIT demand turned out to be a huge extra tax burden for the client company.

RELATED: Tax and Compliance Services from Dezan Shira & Associates

As requested by the client, the Dezan Shira Corporate Accounting Services team took a look at the legal position and tax status of the client and the basis for the tax bureau’s claim. In the course of our Corporate Accounting Services team’s investigation, we discovered that even though the foreign experts were sent to China to work on projects mainly involving the Chinese subsidiary, their employment relationship stayed with the overseas headquarter. Moreover, these employees were in China on business visas (M-visas) rather than work visas (Z-visas), and no taxes had ever been paid on the salaries of these individuals in China.

In order to provide the client with a complete understanding of the Chinese tax bureau’s sudden demand, as well as the tax arrangement relevant to this kind of income derived from China, we drafted and sent a memo to the client explaining the concept and the tax bureau’s methodology when considering such cases. Simultaneously, we calculated the outstanding tax payable and the potential fines and penalties on this amount.

Conclusion

In this case, the client approached our team after being challenged by the tax bureau – too late to avoid the additional taxes which were already incurred over the past few years. The tax bureau had a strong case to demand the deferred IIT payment under this circumstance. But Dezan Shira managed to clearly explain the situation and calculate the taxable amount, as well as offer advice on how to avoid the re-occurrence of such problems in the future.