China has made changes to its individual income tax (IIT) law, which will be effective 1 January 2019, although the increased standard deduction and new tax brackets for salaries are effective 1 October 2018, global accountancy firm Deloitte has advised.
These changes include the introduction of a ‘183 day’ test to define tax residence for non-domiciled individuals and the consolidation of salaries and wages, remuneration for independent services, author's remuneration, and income from royalties into one category called ‘comprehensive income’.
China has also widened the lowest three tax brackets for salaries and increased the standard deduction. In doing this, the additional deduction, which was available for foreign individuals, has been repealed.
A new IIT assessment and filing regime and a tax clearance requirement upon emigration have been introduced.
Government departments will also share information with each other more readily IIT compliance records will be included in the individual credit rating system. The Chinese government also introduced anti-avoidance rules.
Additionally, the changes include a new itemised deduction for dependent parents, as well as the new itemised deductions, such as children’s education, continuing education, medical expenses for critical illnesses, and housing mortgage interest (or rent).
Deductions of charitable donations are generally capped at 30 percent of taxable income, although the cap could be lifted for certain items approved by the State Council.
The final amendments also provide that the scope, standard, and implementation rules for the above additional itemised deductions will be decided by the State Council and reported to the Standing Committee of the NPC.
For remuneration for independent services, author's remuneration, and income from royalties, 20 percent of the gross income is pre-tax deductible. For author's remuneration, a further 30 percent deduction on the reduced gross income is allowed, meaning 56 percent of the gross income effectively is included in comprehensive income for IIT purposes.
The previous category of ‘Other taxable income determined by the Ministry of Finance’ has been removed and now for "other items or situations" where IIT exemptions or reductions will be granted, such items or situations must be determined by the State Council, rather than the Ministry of Finance, and reported to the Standing Committee of the NPC.
Transfer pricing rules have been adopted and allow the tax authorities to make adjustments on non-arm's length transactions between an individual and his/her related party if there is no justification for the failure to comply with the arm's length principle. Tax authorities can make these adjustments only when such transactions result in a reduction of the individual or the related party's tax payable, according to the legislation.
Finally, IIT withholding agents must provide information to taxpayers relating to their income and IIT that has been withheld.
Deloitte commented: “The Chinese tax authorities' competency in tax administration will be significantly enhanced given the introduction of anti-avoidance rules, the implementation of CRS, the active adoption of information technology and information sharing among government departments. Meanwhile, since the IIT compliance records will be included in the credit rating system, noncompliance costs for individuals and withholding agents will increase significantly. Therefore, it is important for individuals and withholding agents to understand new IIT Law to ensure compliance and to seek professional assistance as needed.”
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