People’s Republic of China – IIT Policy for Charitable Donations
People’s Republic of China – IIT Policy for Charitable
On 30 December 2019, the Ministry of Finance and the State Administration of Taxation of the People’s Republic of jointly issued the "Ministry of Finance and the State Administration of Taxation Announcement on Individual Income Tax Policy in relation to Charitable Donations." Known as Announcement 99, the policy will be retroactively applied from 1 January 2019.
On 30 December 2019, the Ministry of Finance and the State Administration of Taxation of the People’s Republic of China (“PRC” or “China”) jointly issued the "Ministry of Finance and the State Administration of Taxation Announcement on Individual Income Tax Policy in relation to Charitable Donations."1 Known as Announcement 99, the policy will be retroactively applied from 1 January 2019.
According to the current PRC Individual Income Tax (“IIT”) Law, the amount of charitable donations made in support of education, poverty alleviation, and relief via social welfare charitable organisations and public authorities in PRC, may be deducted from pre-tax income subject to a cap of 30 percent of the taxpayer’s taxable income. Certain donations regulated by the State Council are fully tax deductible.
WHY THIS MATTERS
Under the income categorisation framework of the new IIT system, Announcement 99 further clarifies the relevant IIT policy on individual donations as well as standardises the tax deduction claims process and corresponding time schedule, which encourages taxpayers to make charitable donations.
Withholding agents and organisations need to be aware of the documentation requirements for tax-deductible donations.
Main Contents and Our Analysis
Scope of the Policy
Announcement 99 sets out provisions on IIT deductions for individuals who donate to social welfare organisations,2 and public authorities (at county government level or above) within the PRC to support education, poverty alleviation and relief.
Value of Donations
|Form of donations||Value of donations|
|Monetary assets||Actual value of donation|
|Equity and real estate||Original value (at acquisition)|
|Other non-monetary assets||Market value|
Deductible Income and Limits
|Taxpayer residency||Deductible income||Limit of tax deduction|
|Residents||Comprehensive income||30% of annual taxable income|
|Business operating income from self-employment||30% of annual taxable income|
|Categorised income (income from lease of property, income from transfer of property, income from interest dividends and incidental income)||30% of annual taxable income|
Tax deduction is allowed on the amount not exceeding 30% of one’s monthly taxable income received in the month of donation.
Any excess donation can be deducted from self-employment business operating income.
When tax deductions are claimed under comprehensive income by tax residents:
|Types of income||Timing of claim|
|Salary income||Withholding / Annual Reconciliation|
|Independent personal service income, author’s remuneration and income royalty income||Annual Reconciliation|
|Income not incorporated into comprehensive income and taxed separately such as annual bonus and equity incentives||Refer to treatment for categorised income|
Provisions for pre-tax deductions against business operating income from self-employment:
|Sole traders||Deduct from operating income|
|Sole proprietorship and partnership||
Individual investors shall apportion the total donations based on the profit-sharing ratio of the partnership business (100% if it is a sole proprietorship enterprise).
Individual investors shall combine the donations made under the sole proprietorship, partnership and other donations claimable under operating income, and claim the full donations under operating income.
|Time of deduction||Withholding or Annual Reconciliation|
|Non-deductible situations||When deemed operating income applies to the business|
Catch-up Deduction Claim
When allowable deductions have not been claimed via the standard process, catch-up claims can be made as follows:
|Circumstances||Catch-up claim method|
|Tax withholding applied but tax unsettled||Submit claim to withholding agent and apply tax refund|
|Tax withholding applied and tax settled||Apply amendment tax filing to claim deductions via withholding agent within 90 days from the date of donation|
|Self-filing taxpayers||Apply amendment tax filing to claim deductions within 90 days from the date of donation|
|Charitable donations made between 1 January 2019 and publication date of Announcement 99 (30 December 2019) which are claimable under categorised income||Apply for retroactive deduction to tax authorities through withholding agent by 31 January 2020|
|Declaration form||Individuals or withholding agents shall submit the "Schedule of Individual Income Tax Deductions for Charitable Donations."|
Announcement 99 clarifies the relevant requirements on tax deductible donations following the introduction of the new IIT law. The below-described aspects should be noted by withholding agents and individual taxpayers.
Withholding agents shall apply allowable tax-deduction amounts during the tax-withholding process according to the relevant regulations, and fulfill the relevant notification, information collection, and reporting obligations. At the same time, organisations should establish relevant internal management and operational processes as soon as possible, and communicate with employees to align responsibilities and obligations of both parties.
Prior to making any donations, individuals shall confirm whether the donation is within the scope of a pre-tax deduction, obtain donation receipts, and provide the relevant documents to the withholding agent on a timely basis. The evidential documents should be properly retained.
Resident taxpayers with multiple sources of income can self-determine the order of the tax deduction against comprehensive income, categorised , and self-employment business operating income. Individuals may carry out relevant tax calculations and planning based on their personal circumstances.
Meanwhile, we also notice certain details in Announcement 99 remain to be clarified, for example:
- The announcement suggests that the value of donations made in the form of non-monetary assets (other than equity and real estate properties) should be determined according to the market price of the assets. However, there is considerable uncertainty in terms of practical valuation of such assets, and this requires further clarification.
- According to the relevant regulations, donations are only tax deductible if made to charitable organisations published by the relevant authorities. However, when donations are made prior to the publication of the official list, the relevant tax treatment needs further clarification.
The KPMG International member firm in China will continue to closely follow the relevant policies on tax-deductible donations, and proactively discuss policy developments and share our practical experiences with the tax authorities.
1 "Ministry of Finance and the State Administration of Taxation Announcement on Individual Income Tax Policy in relation to Charitable Donations" (Ministry of Finance and the State Administration of Taxation Announcement 99 of 2019).
2 Social welfare organisations include charitable organisations, other social organisations, and public communities that are legally established or registered and are qualified to receive tax-deductible donations under the relevant regulations and procedures.
This article is excerpted, with permission, from “Individual income tax policy on charitable donations confirmed,” in China Tax Alert (Issue 3, January 2020), a publication of the KPMG International member firm in the People’s Republic of China.
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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