China Expats, Employers to Get Hit With Social Welfare Costs
By Eunice Ku
Jun. 14 – On June 10, 2011, China’s Ministry of Human Resources and Social Security released two measures to the public for solicitation of opinions: namely the “Interim Measures for the Participation in Social Insurance of Foreigners Employed in China (Draft for Comments)” and the “Measures on the Administration of Social Insurance Record of Individuals’ Rights and Interests (Draft for Comments).” The comment solicitation period for both draft measures ends on June 17, 2011.
The two draft measures were formulated based on the Social Insurance Law, which is set to take effect on July 1, 2011. The respective draft measures are discussed below.
Draft Interim Measures for the Participation in Social Insurance of Foreigners Employed in China
The draft Interim Measures are relatively short, consisting of only 12 articles. According to the Interim Measures, foreigners who are legally employed by enterprises, public institutions, social groups, privately-owned non-enterprise units, foundations, law firms and accounting firms which have been registered or recorded in line with the laws in China are required to participate in the following insurances: basic pension insurance, basic medical insurance, work-related injury insurance, unemployment insurance and maternity insurance. The employing units and foreigners should pay the social insurance premiums in accordance with relevant regulations.
For foreigners who entered into employment contracts with employers outside of China and are dispatched to work in branch or representative offices registered or recorded in China, they and the branch or representative office are also required to pay the social insurance premiums in accordance with relevant regulations.
The Interim Measures provide that, where a foreigner departs China prior to the stipulated age for receiving pension, his or her individual account will be retained. Where the foreigner reenters China for employment, the payment period can be calculated cumulatively. Upon written application by the foreigner, the social insurance agency can pay the foreigner the amount in his or her individual account in one lump sum and terminate the basic pension relationship. Upon the foreigner’s death, the amount remaining in his or her individual pension insurance account can be inherited.
The Interim Measures cover Chinese who are citizens of the Hong Kong Special Administrative Region and Macao Special Administrative Region, as well as citizens of Taiwan. These personnel, as well as all foreigners legally employed in China, will be issued social insurance cards and assigned social insurance numbers.
For foreigners who are nationals of countries that have entered into bilateral or multilateral treaties relating to social insurance with China, his or her social insurance participation will be handled in accordance with such treaties.
Since the promulgation of the Social Insurance Law in October 2010, there has been much debate and uncertainty as to the extent to which the Law applies to foreigners, and whether or not foreigner’s participation in social insurance would be mandatory. The draft Interim Measures clarify the government’s intent to include foreigners into China’s social insurance scheme.
Draft Measures on the Administration of Social Insurance Records of Individuals’ Rights and Interests
These draft Administration Measures provide for the methods by which social insurance agencies are to collect information relevant to individuals’ social insurance rights and interests. In addition to participants and their employers, designated hospitals and pharmaceutical retail shops are among the entities required under the Administration Measures to provide accurate information in a timely manner to social insurance agencies.
The Administration Measures emphasize the reliability and security of the information collection process. For example, where social insurance agencies collect information on individuals’ social insurance rights and interests through online declaration, they are required to adopt ID verification, encryption and anti-repudiation security mechanisms. Furthermore, a system with multiple layers of review and verification of the collected information is required to be established. Social insurance agencies are not permitted to delegate entirely the maintenance of the data on the record of individuals’ rights and interests to another entity or individual. Where other entities or individuals assist with the maintenance, social insurance agencies are required to enter into confidentiality agreements with them.
In order to ensure that the information on individuals’ rights and interests can be accessed uniformly, the Administration Measures require that the human resources and social security special network be connected to the various levels of social insurance agencies and service outlets. Social insurance agencies are also required to establish an information enquiry and administration system on the record of individuals’ rights and interests, which provides enquiry services to participating personnel and units through service outlets, self-help terminals, telephones or web sites. Social insurance agencies are also required to mail a record of the individuals’ rights and interests to participants at least once a year free of charge.
Expected employer/employee contributions
There are still discussions about how much the eventual amounts due will be, although it seems logical to apply the rates currently applied to Chinese nationals, minus housing fund contributions (which remain only for Chinese employees). These rates, however, are calculated on a city and provincial basis, not a national basis, as minimum welfare and other regional conditions impact upon China’s different regions in different ways.
A breakdown of these minimum employer welfare payments for the cities of Dalian, Qingdao, Beijing, Shanghai, Hangzhou, Ningbo, Shenzhen, Guangzhou, Zhongshan, Dongguan, Shenyang, Tianjin, Chengdu, Suzhou, Xi’An, Changchun, Nanjing, Jinan, Kunming and Zhengzhou were all included in this recent issue of China Briefing Magazine.
Our own research has found some confusion regionally concerning what social welfare contributions would be levied on expatriate employees and their employers. However, as a general rule of thumb, social insurance rates to be contributed by the employer may amount to an additional 16 percent to 37 percent of salary paid, and from the employee, a contribution of 9 percent to 12 percent may be deducted from salary as their contribution. Please contact your local tax bureau for the exact rates applicable in your region. It is also worth noting that contributions at the regional rates will be capped by a ceiling of between approximately RMB7,000 – RMB13,000 per month, also varying depending on which city the company is based in. Therefore, for high-earning expat employees, the actual burden for both company and individual will be less than the headline rate suggests, yet still significant.
Expat employees and their employers would be liable for these amounts after the employee has spent six months in China. Fines for non-compliance are expected to be three times the amounts due. Specifically targeted in these proposals are all foreign workers employed by Chinese and overseas-funded enterprises, social groups, law firms and foundations that register in China, as well as foreign workers assigned to China by overseas registered companies. The recent 2010 census suggests about 600,000 foreign nationals reside in China, and should the social welfare burdens kick in to Chinese levels of contribution, that number would be expected to drop considerably.
The public can submit their opinions on these draft measures by accessing the relevant web site (www.chinalaw.gov.cn), by e-mail (email@example.com), by fax (011-84233796), or by mail to the Legislation Department of the Ministry of Human Resources and Social Security.
“The issue here is not whether China will implement the collection of welfare from foreign employees – because I think they will – but how well managed that collection will be,” comments Chris Devonshire-Ellis, principal of Dezan Shira & Associates. “It is not on one hand unreasonable for the Chinese government to levy social insurance costs on expat employees, the United States for example does the very same thing. What may become an issue however is the current standard of care provided, and the efficiency of accessing that.”
“Even amongst Chinese nationals, the procedures required to tap into their individual social welfare fund are highly complicated and seem almost designed to prevent access when needed. Additionally, the standard of care provided is generally low in relation to the amount of welfare actually paid,” Devonshire-Ellis continues. “Although there does seem to be a ‘refund’ mechanism in place should the employee leave China, I have concerns about employees trying to exit the country if their fund is not up-to-date, and the abilities of individuals to actually collect refunds upon departure. I have previously looked into the aspect of China’s welfare system in an earlier article and the official figures about how it is used and who gets relief are completely obtuse. I’m not sure whether foreign expats or employers used to a more transparent system in the West will be totally happy with the management of their social welfare contributions in China given the existing structure of the current model. It could act as a catalyst for welcome change within that, or it could create friction and frustrations between the Chinese government and expatriate employees in China. Expatriates and their employers in China would be well advised to contact their respective chambers to make their own views heard about this new employment expense.”
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. The firm specializes in assisting foreigners and foreign enterprises with their tax obligations, HR contributions, and financial management. For advice, please email firstname.lastname@example.org, visit www.dezshira.com, or download the firm’s brochure here.
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