This report covers the new Chinese Implementation Rules and supplementary guidance notes pertaining to implementation of the new Individual Income Tax (IIT) rules and providing important guidance.
In order to implement the amended PRC Individual Income Tax (“IIT”) law1 accurately, a series of administrative measures2 have been promulgated in the People’s Republic of China (“PRC” or ‘China”) which aim to improve and streamline administration, delegate power, and enhance services.
The State Council and the State Administration of Taxation (“SAT”) released the implementation rules (“Implementation Rules”) and supplementary guidance notes, implementing the new IIT rules and providing important guidance on the following：
The Implementation Rules and guidance notes are effective from 1 January 2019.
In this GMS Flash Alert, we cover some of the salient points of the Circulars.
The scope of the changes is wide-ranging. For example, there is to be a significant change to the IIT withholding mechanism. The adoption of a cumulative withholding methodology will result in lower tax withheld in the earlier months and higher tax withheld in the later months during a tax year.
There are to be different IIT withholding methodologies for resident taxpayers and nonresident taxpayers. Withholding agents need to assess and determine the residency status of their employees in order to withhold IIT properly.
The onus will be on taxpayers to be responsible for the authenticity, accuracy, and completeness of the information provided for the itemised deductions they claim.
Announcement 56 sets out the IIT withholding calculation methodologies for resident and nonresident taxpayers.
Comprehensive income derived by resident taxpayers is subject to tax withholding as summarised below.
Salary and Wages: Salary and wages earned by resident taxpayers are subject to PRC IIT withholding based on the cumulative withholding method, as follows:
Personal Services Income, Author’s Remuneration, and Royalties: PRC IIT should be withheld separately in respect of personal services income, author’s remuneration, or royalties. Personal services income is subject to withholding3.
Author’s remuneration and royalties are subject to a flat withholding rate of 20 percent.
Annual Reconciliation for Comprehensive Income: Resident taxpayers who derive comprehensive income that has not had the correct withholding tax applied at source during the tax year should perform an annual reconciliation filing. The annual reconciliation filing, to settle the tax due or claim a tax refund, should be performed between 1 March and 30 June following the tax year.
Salary and wages, personal services income, author’s remuneration, and royalties derived by nonresident taxpayers are subject to tax withholding as summarised below.
Salary and Wages: Salary and wages earned by nonresident taxpayers are subject to monthly PRC IIT withholding4 after the monthly personal deduction of RMB 5,000.
Personal Services Income, Author’s Remuneration, and Royalties: Personal services income, author’s remuneration, or royalties is subject to PRC IIT withholding separately and on an occurrence/monthly basis5.
(Applicable to Resident Taxpayers Only）
The following are notable differences between the recently-issued Interim Measures and the Draft, which was reported on in GMS Flash Alert 2018-142 (31 October 2018). Also, see:“China Tax Alert” Issue 22, 24 October 2018.)
Announcement 60 sets out the detailed administration requirements for itemised deductions including the timing of the claim, reporting requirements, and supporting documents from both individual taxpayers and their withholding agents.
The Implementation Rules sets out that individuals who are regarded as non-domicilaries of China and have not been tax resident of China for more than six consecutive years may claim exemption on their foreign-sourced income paid overseas by performing a “put-on-record filing” with the tax authorities.
For any year during which a non-domiciliary of China is away from China for more than 30 continuous days, the six-year residence period will restart.
The Implementation Rules and the supplementary guidance notes did not provide any details on the General Anti-Avoidance Rules (“GAAR”) and removed certain clauses which were introduced by the Draft implementation rules, such as the “deemed transfer rule,” tax collection, and administration rules on partnerships.
With these measures, the government aims to strengthen tax collection and administration, while trying to reduce individual taxpayers’ tax burdens and their withholding agents’ administration costs.
However, some areas remain still unclear, such as detailed implementation rules on GAAR. These are expected to be clarified in another batch of circulars to be released. Individual taxpayers and their withholding agents need to pay attention to the following:
Individual Taxpayers and Their Employers
With respect to the Six-Year Rule, further clarifications are expected regarding the commencement of the “six years” and the details of the put-on-record filing required to claim a tax exemption on the foreign-sourced income derived by non-domiciled individuals.
High Net-Worth Individuals
As mentioned in our previous reports, GAARs were introduced under the new IIT regime. Detailed implementation rules on the GAAR have not been included in the above-mentioned Implementation Rules and supplementary guidance notes and are expected to be introduced in separate circulars.
The KPMG International member firm in China will continue to pay close attention to the relevant circulars to be promulgated under the new PRC IIT regime and share our observations. Please feel free to contact us for the most recent news in relation to IIT reform and other tax regulations.
1 For prior coverage of the reform of China’s IIT, see GMS Flash Alert 2018-142 (31 October 2018).
2 SAT Announcement  No. 56 - Announcement of the State Administration of Taxation (“SAT”) on Transitional measures pertaining to Tax Collection and Administration for Enforcement of the Individual Income Tax Law (“Announcement 56”).
Order No. 707 of the State Council - Implementation Rules for the Individual Income Tax (“IIT”) Law of the People's Republic of China (“Implementation Rules”).
Guofa  No. 41 - Notice of the State Council on Interim Measures for Administration of Itemised Deductions (“Interim Measures”).
SAT Announcement  No.59 - Announcement of the SAT on Matters Concerning the Identification Number of Individual Taxpayers (“Announcement 59”).
SAT Announcement  No.60 - Announcement of the SAT on Administrative Measures for IIT Itemised Deductions (Trial Implementation) (“Announcement 60”).
SAT Announcement  No.61 - Announcement of the SAT on Trial administrative measures for individual income tax withholding (“Announcement 61”).
SAT Announcement  No.62 - Announcement of the SAT on Matters concerning self- declaration of individual income tax (“Announcement No.62”).
3 For the withholding rate tables for residents’ salary and wages and personal services income, as well as for nonresidents, see “Implementation Rules of the Amended PRC IIT Law and the Supplementary Guidance Notes Issued,” in China Tax Alert (Issue 29 (PDF 1.55 MB), December 2018, updated January 2019) a publication of the KPMG International member firm in the People’s Republic of China.
For a full report on the Implementation Rules and Supplementary Guidance from the KPMG International member firm in the People’s Republic of China, see “Implementation Rules of the Amended PRC IIT Law and the Supplementary Guidance Notes Issued,” in China Tax Alert (Issue 29 (PDF 1.55 MB), December 2018, updated January 2019).
The information contained in this newsletter was submitted by the KPMG International member firm in the People’s Republic of China.
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