By Lily Xu and Rosario Di Maggio/Dezan Shira & Associates
GUANGZHOU, Sept. 30 – Individual income tax (IIT) in China is a complex subject and often misunderstood. Ask one expatriate, then ask another, and they’ll give you different opinions. However unfortunately, expatriates do not decide China’s tax regulations. Neither is the situation short of clarity in the eyes of China’s tax bureau, who are quite clear on the subject and who are progressively clamping down on abuse of non-working visas and the under-declaration of income by expatriates in China.
Nearly a year after the State Administration of Taxation released guidelines on self reporting IIT, and more than nearly two years since the IIT payment system was strengthened, we still find confusion and carelessness on the part of expatriates and local inconsistency and sometimes even unjustified abuses from the tax authorities. There is however, a welcome trend developing to simplify the taxation system that is leading some cities to modernize and simplify people’s life.
Here is a practical case that occurs often when dealing with IIT, many times leading to a contradictorily situation.
According to the minimum payroll list for foreigners* in Dongguan, for example, a U.S. or European general manager working for a medium-large enterprise, with an investment of US$2 to 3 million in China is supposed to have a taxable salary of (at least) RMB23,400 and an IIT of RMB3,345, while a technician of a small Italian or Spanish WFOE would be supposed to receive RMB16,080 and pay RMB1,881 as income tax. Furthermore, according to the law, there are expenses such as rental fees, meal allowances and even laundry that can be deducted before taxes so that may actually be a consistent part of the gross income (there are, of course, limits on the deductible welfare).
Being clear that the “minimum payroll list for foreigners” is only a standard for the tax authorities to identify a reasonable payroll level and not a standard for individuals to pay their IIT (this would be illegal). Because Individual income tax is calculated based on actual salary, the tax authorities can sometimes be unreasonable, refusing to accept deductible welfare related expenses or even denying the possibility to deduct them, making the taxable income higher and therefore, a higher IIT payment.
Structuring a proper expatriate salary, being sure to deduct what is deductible and pay the amount China requests by law would then ensure that expatiates did not waste a significant part of their salary, while at the same time being in compliance.
*The minimum payroll list for foreigners is a list of expected salary for foreign employees residing in China and related amount of individual income tax that the local tax bureaus use to assess minimum foreigner’s IIT liabilities. The list varies from city to city and takes into consideration the job position and the nationality of the foreigner, as well as the total investment of the employee’s investing company. The list is not an official paper and is used as a reference by the local tax authorities to challenge a taxpayer who may be considered paying lower taxes or declaring lower salaries.
For more information regarding individual income taxes for expatriates, please see the January/February issue of China Briefing.
For business advisory services, assistance establishing, structuring or operating a business and contract drafting in Guangzhou, please contact Rosario Di Maggio in the Guangzhou office of Dezan Shira & Associates at email@example.com, tel.  3825 1725.
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