China’s IIT Special Tax Deduction: Trial Procedures Change Process for Taxpayers
On December 21, 2018, China’s State Bureau of Taxation announced the “IIT Special Deduction Procedure (Trial Implementation)” (or “Trial Implementation”). The Trial Implementation, which took effect from January 1, 2019, marks the first phase in a gradual reform of special tax deductions under China’s new IIT Law.
In short, the Trial Implementation raises the ceiling for two categories of deductibles, reforms tax exempted allowances for expatriate taxpayers, and changes the way taxpayers claim special tax deductions. Employers and taxpayers need to review these new developments.
China’s IIT Special Tax Deduction
The Trial Implementation defines six categories for the IIT special deduction:
- Children’s education;
- Continuing education expenses;
- Healthcare costs for serious illness;
- Housing mortgage interest;
- Expense for supporting the elderly; and
- Housing rent.
Compared with the previous draft version, the Trial Implementation will affect two categories. The standard deduction amounts for healthcare costs for serious illness and housing rent costs both increased:
- For healthcare costs for serious illness, the annual deductible ceiling amount increased from RMB 60,000 (US$8,758) to RMB 80,000 (US$11,677); and
- For housing rent, the monthly deductible increased from RMB 1,200 (US$175) to RMB 1,500 (US$219) in first tier cities (such as capital cities), and the monthly rental cost claim increased from RMB 1,000 (US$146) to RMB 1,100 (US$160.56) in cities that have a population of more than 1 million people.
Notably, under the Trial Implementation, the deductible for healthcare costs for serious illness can be availed by the taxpayer and their spouse or children. This new measure will provide more benefits to families.
The newly added special deductions are available for both domestic and expatriate employees. In the past, all foreign employees were entitled to apply some tax exempted allowances (for example, housing, laundry, home visit, education, etc.).
Under the new law, expatriates can still apply those tax exempted allowances, but only until the end of year 2021. During the transition period (or the three years between the start of 2019 and the end of 2021), expatriates can still apply those tax-exempted allowances, or they can apply for the six special deductions.
However, once the expatriate has chosen whether to avail of the tax exempted allowances or six special deductions, they cannot change policies during one calendar year. Further, after the three-year period expires in 2022, expatriates will no longer enjoy the tax exempted allowances policy and will have to follow the same tax law as domestic employees.
How to claim special tax deductions
The Trial Implementation stipulates that taxpayers who want to claim special tax deductions have to provide their personal information and keep the relevant documents as evidence for five years. In other words, taxpayers need to register via an IIT application (which requires face recognition) or physically go to the local tax bureau to complete personal registration.
However, we note that foreign taxpayers may need to physically visit the tax bureau and get the registration done in-person.
Once the taxpayer has their personal account activated by the bureau, they may claim the special tax deductions through their employer or directly through their annual tax filing.
In regards to the latter, the Trial Implementation stipulated that the special tax deduction can be managed by the individual via annual tax clearance if the taxpayer does not want to share personal information with their employer. Accordingly, the taxpayers can choose to not disclose personal information to a third party (such as an employer); this may help taxpayers protect their privacy, providing a degree of flexibility.
Taxpayers should note that local authorities may need time to determine how to manage deductions under the Trial Implementation. Accordingly, taxpayers and their employers should study the relevant laws and consult with their trusted local advisers to learn more about claiming special tax deductions under the Trial Implementation.
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