On 19 June 2018, during the third session of the Thirteenth National People’s Congress of the People’s Republic of China (“ PRC"), Mr. Liu Kun, the Minister of Finance, Ministry of Finance of the PRC, outlined the proposed amendments to the PRC IIT law. Mr. Liu confirmed that the draft amendments have been agreed by the State Council. This marks an important step forward in reforming the PRC IIT law.
The Release on the Draft delivered two key messages about the coming PRC IIT reform:
Reducing tax burden
The Draft proposed to amend the PRC IIT Law by reclassifying income to apply comprehensive income taxation, adjusting the income tax brackets; raising personal deduction on comprehensive income, and allowing itemised deduction for specific expenditures. If introduced, low and middle- income earners will benefit from the reform.
However, the Ministry of Finance is silent on details of the proposed itemised deductions and the corresponding procedures to supplement the implementation and ongoing administration of the rule, which will be closely followed by the public throughout the IIT reform process.
The Draft indicated that the new IIT regime will no longer retain the existing additional personal deduction currently enjoyed by foreigners, and at the same time, introduces the concept of itemised deductions in respect of expenditures such as children's tuition and housing rental. It begs the question whether the existing tax exemption treatment of certain fringe benefits received by foreign employees will likely to be revoked the new IIT regime, to represent adoption of the national tax treatment principle.
Safeguarding the integrity of National Tax Base
Introducing tax residence concept
The Draft introduces the concept of resident and non-resident, and modifies China’s personal tax residence rule from the existing one-year test to a 183-day test. It is uncertain whether the reform will take into account of the following factors, which will directly impact the taxation basis and employment arrangements of expatriates, overseas Chinese and residents from Hong Kong, Macao and Taiwan in China:
General anti-avoidance rule
General anti-avoidance rules are a feature of many jurisdictions’ tax legislation, and China has already concluded anti-tax avoidance agreements with 103 countries and jurisdictions. Since the implementation of the Common Reporting Standards (“CRS”), China has concluded bilateral Competent Authority Agreements and activated bilateral exchange relationships with 76 countries and jurisdictions. Introducing an anti-avoidance rule for individual income tax signals China’s approach towards compliance and utilising the automatic exchange of financial account information under CRS to increase enforcement of IIT obligations.
The Release on the proposed amendments to PRC IIT Law marks an important step forward on the IIT reform. The imminent reform coupled with the strengthened tax collection and administration system in China, will undoubtedly elevate the importance of individual income tax compliance. With that in mind, enterprises and individual taxpayers should pay close attention to the IIT reform in order to review own circumstances and seek professional advice to avoid unnecessary cost from non-compliance.