China Adjusts Methods of Income Tax Prepayment for Fresh Graduates and Interns

Posted by Written by Zoey Zhang Reading Time: 3 minutes

On July 28, 2020, the State Taxation Administration (STA) rolled out the Announcement on Adjusting Methods of Prepayment of Individual Income Tax for Some Taxpayers (STA Announcement [2020] No.13), which came into effect July 1. The Announcement has clarified the methods companies can use to calculate prepaid individual income tax (IIT) for fresh graduates and interns.

Calculating the prepaid individual income tax for fresh graduates

According to the Announcement, if a resident has obtained income from wages and salaries for the first time within a tax year, the withholding agent can adopt the ‘cumulative withholding method’ to calculate the cumulative tax amount to be withheld based on the monthly deduction of RMB 5,000 (US$716) from the beginning of the tax year.

For example, if a fresh graduate joins a company in July this year, the employer can deduct RMB 35,000 (US$5,015) [RMB 5,000 x 7 months] from the employee’s accumulative salaries since July when calculating the IIT that should be withheld and paid in advance in the current period.

To be noted, ‘a resident who has obtained income from wages and salaries for the first time’, as mentioned in the Announcement, refers to a resident who has not obtained income from wages and salaries or continuous remuneration for labor services from the first month of the tax year to the time of new entry. However, if the taxpayer only accidentally obtained income from labor remuneration, author’s remuneration, and loyalties before the new entry, the calculation of prepaid tax amount can still apply to the provisions of this announcement.

Calculating the prepaid IIT for college students

In addition, if a college student gets paid for internship jobs, the withholding agent can calculate tax deductions according to the Announcement on Administrative Measures on Declaration of Individual Income Tax Withholding (Trial Implementation) (STA Announcement [2018] No.61).

According to STA Announcement [2018] No.61, the tax amount to be withheld for the current period is calculated as follows:

Tax amount to be withheld for the current period = taxable income amount subject to cumulative withholding × withholding rate – quick deduction – cumulative tax credit – cumulative withheld amount

Therein: cumulative deduction expenses shall be computed by multiplying RMB 5,000 (US$716) per month with the number of months for which the taxpayer is employed by the withholding agent as at the current month in the current year.

The withholding rate and quick deductions applies the IIT Withholding Rates Table 1 of the STA Announcement [2018] No.61.

For example, if a college student receives RMB 3,000 (US$430) as a labor remuneration for their internship program in a company in July, the company can adopt the cumulative withholding method to calculate and withhold the IIT on the intern’s labor remuneration. Under the cumulative withholding method, the college student does not need to pay tax in July after the deduction of RMB 5,000 (US$716) [RMB 5,000 x 1 month]. If the student has no other comprehensive income within the year, there is also no need to handle the annual tax refund.

How taxpayers and withholding agents can apply conditions in the Announcement

Taxpayers may decide whether or not to comply with the conditions set forth in this announcement according to their own circumstances.

Those who meet the conditions should make a statement to the withholding agent in time and provide relevant supporting materials or letter of commitment truthfully – fresh graduates can show their graduation card or dispatch card as a proof; interns may present their student ID card; taxpayers who receive income from wages or salaries for the first time in a tax year may provide a letter of commitment if they are not able to provide other supporting information.

After the withholding agent receives the relevant supporting materials or the letter of commitment, it can withhold and prepay the IIT for the taxpayer according to the methods stipulated in this announcement.

At the same time, the taxpayer should be responsible for the authenticity, accuracy, and completeness of the supporting materials and the letter of commitment provided to the withholding agent. The taxpayer and the withholding agent should also retain the original or copy of the relevant supporting materials and the letter of commitment for any future inspection.

We suggest that when employing the following personnel, the enterprise can confirm in advance whether the employee meets the conditions stipulated in this announcement, obtain the supporting information or letter of commitment of the employee, and withhold the IIT amount according to the new withholding method:

  • Fresh graduates or interns;
  • Foreign employees (who will be living in China for full 183 days in a tax year) dispatched from overseas to a Chinese company; and
  • Other staff employed for the first time in a tax year who have not obtained income from salaries and wages and continuous labor remuneration.

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