The following matters are covered in this issue:
- Proposed amendments to China Individual Income Tax
- Further guidance on attracting foreign investment (Guo Fa  No. 19)
- Simplified customs supervision for processing trade (GAC Announcement  No. 59)
- China to impose additional tariff on US$50 billion of US imported goods
- Notice on preferential urban and township land use tax treatment on land rented by logistics enterprises for bulk commodity warehousing facilities
Proposed amendments to China Individual Income Tax
In the course of the March 2018 meetings of China’s 13th National People’s Congress (NPC), the Ministry of Finance (MOF) had committed to reform the individual income tax (IIT) system. The plans included: (i) raising the entry income threshold for imposition of IIT; (ii) enhancing deductions for children’s education and other personal outlays; and (iii) transitioning to consolidated IIT calculations and filings (in place of the current scheduler system). It was indicated that salaries and wages, and independent service income, would be consolidated for tax calculation purposes (see KPMG China Tax Weekly Update (Issue 10, March 2018) for details).
On 19 June 2018, the proposed amendments to China’s IIT law (“draft IIT bill”) was deliberated at the third session of the 13th NPC. It should be noted that it has not yet been adopted by the NPC.
Mr. Liu Kun, the Minister of Finance, outlined the key amendments in the draft IIT bill as follows:
- New tax resident rule: Foreign nationals are currently treated as Chinese tax residents after one year of continuous presence in China. A foreign national with a continuous absence of 30 days in a tax year, or non-continuous absences of 90 days in a tax year, would not be regarded as a tax resident. As a non-resident, a foreign national is only subject to IIT on its China-sourced income. This is complemented by a further special concession, set out in the implementation rules of the IIT law rather than the law itself, under which foreign nationals working in China will only be subject to IIT on their worldwide income after 5 years of continuous residence in China. It is now proposed that the one year test will be lowered to 183 days, and the five year concession may be abolished; the latter point is yet to be confirmed. These changes would have significant implications for the taxation of the income of foreign nationals, sourced outside China. In particular, if the five year concession is abolished and a foreign national meets the 183 days presence test, then he would be subject to China IIT on his worldwide income.
- Consolidated taxation of earned income: Four categories of income, covering salaries and wages, professional services, author’s remuneration and royalties, will be consolidated and subject to progressive tax rates. Tax residents will transition from monthly filing to annual filing for such income. Existing categories of business income will be incorporated into this comprehensive income category, or a new ‘income from operations’ category, depending on their nature. Income from operations, interest income, dividends, leasing income, asset transfer gains, and other income will still be taxed separately, on a monthly basis, at separately prescribed rates.
- Adjustment to income tax brackets: Comprehensive income is to be subject to the already existing progressive tax rates of 3% to 45%, though the seven brackets are now calculated on an annual as opposed to monthly basis. To relieve burdens on low earners, the 3%, 10% and 20% brackets are widened, and the 25% bracket is narrowed. The subsequent 30%, 35% and 45% brackets kick in at the same income levels as before. ‘Income from operations’ will, as at present, be subject to progressive tax rates from 5% to 35%, though low earners are supported, with entry to the 35% bracket now starting at RMB500,000 rather than the current RMB100,000.
- Enhanced tax deductions: The personal deduction, taken against comprehensive income, will now rise to RMB5,000 per month from RMB3,500 for Chinese nationals and RMB4,800 for foreign nationals, as at present. There are also an increased number of deductions to reflect personal circumstances including expenditures on dependent children’s education, continuing education, serious illness medical treatment, housing mortgage interest and rentals. These complement the existing deductions for social security contributions (which cover basic pension insurance, basic medical insurance, unemployment insurance, and housing fund contributions). They also complement the more recent deductions provided for private health insurance and pension insurance. The latter one is still being piloted.
- Introduction of general anti-avoidance rules (GAAR): Such rules, modelled on those in the corporate income tax (CIT) law, would allow the tax authorities to adjust taxable income relating to asset transfers not at arm’s length, avoidance using offshore tax havens, and other artificial tax-motivated arrangements.
The upshot of the proposed changes is to reduce the tax burden on lower earners, reduce the relative preferences for foreign nationals under the existing IIT law, give greater recognition to personal circumstances and expenses in the IIT calculation, and introduce anti-avoidance provisions.
For detailed analysis of the draft bill, please read the following KPMG publication:
Further guidance on attracting foreign investment
In 2017, the Chinese government set out string of measures under Guo Fa  No. 5 and No. 39 to boost foreign investment in China (see KPMG China Tax Weekly Update (Issue 4, January 2017) and (Issue 33, August 2017) for details). In April 2018, Chinese President Xi Jinping also indicated that China will further open up the economy with new measures to include (i) broader market access and (ii) more attractive investment environment (see KPMG China Tax Weekly Update (Issue 15, April 2018)). To give effect to these plans, the State Council issued Guo Fa  No. 19 (“Circular 19”) on 15 June 2018.
Circular 19 sets out 23 measures; those of tax and finance relevance include:
|Broaden market access
|Improve administration for foreign investment
|Enhance foreign investment promotion
Circular 19 also provides guidance on the following:
- Improving investor protection to build a high-standard investment environment;
- Optimizing regional investment distribution and guiding foreign investment in Central and Western China;
- Promoting development of national development zones, and effectively utilizing foreign investment.
Simplified customs supervision for processing trade
Prior to 1 August 2017, the process trade business was supervised by China Customs on a contract-by-contract basis. Under this supervision approach, enterprises engaged in the processing trade were required to set up a handbook for each processing trade contract and make recordal filings with customs offices. In some cases, an enterprise may need to set up dozens of handbooks in one year. Once a contract is completed, the enterprise is also required to go back to the customs office for deregistering the contract. This creates a heavy workload for both the customs offices and enterprises.
To address this, the General Administration of Customs (GAC), from 1 August 2017, piloted a new customs supervision approach for the processing trade in nine customs offices. This included Tianjin, Shenyang, Nanjing, Hangzhou, Wuhan, Gongbei, Huangpu, Chongqing and Chengdu. Later, this was extended to cover an additional 26 Customs offices from 5 March 2018.
On 21 June 2018, the General Administration of Customs (GAC) issued Announcement  No. 59 (“Announcement 59”). This further extends the new customs supervision approach nationwide, effective from date of issuance.
Under the new method, process trade businesses will be supervised on an ‘enterprise basis’, as opposed to the former ‘contract-by-contract basis’. This means that:
- An enterprise is only required to set up one electronic account book to manage its processing trade activities. The account book, when set up, will refer to the HS codes of the products that the enterprise is processing, or the relevant product numbers.
- The enterprise can set the timeframe for periodic declaration with customs offices based on the timeframe of its production cycle. For production cycles exceeding one year, the enterprise is required to make a declaration with the customs offices on an annual basis. Under the old method, the declaration period will be determined based on term of contract for a maximum period of one year. Any extension was also restricted to one year.
- Goods receipts and shipping records will no longer be required to be sent to Customs offices, but need to be kept on file at the enterprise in case of audit.
With regard to the detailed analysis of Announcement 59, please read KPMG China Tax Alert (Issue 15, June 2018) for details.
Other recent regulatory and tax circulars:
- China to impose additional tariff on US$50 billion of US imported goods (Shui Wei Hui Announcement  No. 5, issued on 16 June 2018)
- Notice on preferential urban and township land use tax treatment on land rented by logistics enterprises for bulk commodity warehousing facilities (Cai Shui  No. 62, issued on 1 June 2018)