Some interesting clarifications on application of IIT.
Comments (0) This is a bit late but it is worthy of commenting on. On 17 August State Administration of Taxation issued Guoshuifa [2009] No.121 (“Circular 121″) to clarify the application of individual income tax (“IIT”) in various circumstances. These included the following:
- “Double pay” (also widely known as “13th month salary”) is no longer taxed as separate month of income;
- Director’s fees and salary income received by executives (including those from related companies) need to be combined and taxed as “salary income”;
- Overseas Chinese (“Huaqiao”) undertaking employment in China would be entitled to a monthly allowance of RMB4,800 (similar to foreign employees) when calculating their IIT liabilities only if certain tests are satisfied; and
- Real property transferred between spouses due to a divorce settlement is exempt from IIT. In the case of subsequent disposal, the gain (i.e. the sales proceeds less the total original cost base and reasonable expenses) will be subject to IIT unless the real property has been the only family home for at least five years.
Point 2 above is probably the most interesting. For those that dont know China’s IIT law separates income into separate heads of income, for example “salary income” where a person is an employee and “individual service income” where a person is a independent contractor. Traditionally, directors income was taxed as “individual services income”. The effect of changing this to “salary income” head and combining it with the director’s income as an employee will likely lead to significantly higher tax being paid. This is because individual services income is taxed at a flat rate of 20%, whereas salary income is taxed using a progressive tax brack – the rates being from 5% to 45%. Combining the income from directorship and employment is likely to mean that a taxpayers overall monthly income falls in a bracket higher than 20%.
The change also limits the tax planning tactics available. Previously packages coould be structured to achieve tax optimisation. This will be more difficult to do in the future. This is probably one of the policy reasons for the change.
