U.S. and China Clarify IIT Treatment for Each Other’s Academic Workers

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Apr. 6 – The United States and Chinese academic workers who are eligible for a three-year-long individual income tax (IIT) exemption according to the China-U.S. double tax agreement (DTA) may now want to pay special attention to the newly-signed protocol that further specifies the calculation method of such favorable tax treatment.

On September 29 and November 24 last year, the taxation administrations of the United States and China, respectively, signed new protocols for the interpretation of Article 19 in the original China-U.S. DTA. According to Announcement 16 released on March 7, 2011, by China’s State Administration of Taxation, the new protocol took effect on November 24, 2010 and applies to the income of related academic activities derived after the effective date, or before the date but has not completed tax reporting.

The original Article 19 enables U.S. and Chinese residents who teach, give lectures and conduct research at universities, colleges, schools or other accredited educational/scientific research institutions in the other’s country to stay exempt from IIT liability during the first three years of their residence in the country.

The new protocol specified related details such as the calculation method with regards to the three-year period, and the tax treatment for those teachers and researchers who stay in the other country for longer than three years.

The three-year IIT exemption period starts on the individual’s arrival date to the other country. However, the calculation of the IIT exemption period shall be discontinued when the individual leaves the said country and be resumed when the individual returns.

If the individual stays in the said country for three years accumulatively, the country can start IIT collection from him/her from the first day of the fourth year.

The protocol emphasized that only individuals who enter the other country with teaching, lecturing and researching as their primary purposes are eligible for the three-year IIT exemption. It also added that the IIT exemption does not apply to research activities for private interest.

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 foreign enterprises with their tax obligations. For advice, please email tax@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.

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