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TAX & FINANCE: China’s Individual Income Tax Reform
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China’s Individual Income Tax Reform
Draft Amendment for Public Comment: More details, more attention
By Kelvin Lee, PwC Tianjin

BT 201809 Finance 01关注个税改革
税法修正案草案公开征求意见引关注,更多要点见细节

继第十三届全国人民代表大会常务委员会第三次会议对个人所得税法修正案草案进行了第一次审议,2018年6月29日该修正案草案在全国人大官网公布,开始为期一个月的公开征求意见。

我们对该修正案草案进行了深入研究,部分重要细节内容如下:

确定综合所得及经营所得适用税率。修正案草案对现行税法中适用于工资薪金所得和适用于个体工商户的生产经营所得和对企事业单位的承包经营承租经营所得的两个税率表进行了结构调整,调整后的税率表将分别使用税法修改后的综合所得(详见附录1)和经营所得(详见附录2)。

变革个税征管制度,适应以综合征收为起点的新税制。我们预期的综合所得按月预(扣)缴、年度汇总、多退少补相结合的征管机制在修正案草案中得到印证。同时修正案草案建立了纳税人识别号制度,修订了纳税人与扣缴义务人的义务(详见附录3),明确了扣缴/纳税申报时限(详见附录4),为个税征管提供法律保障。

增加反避税条款。修正案草案列明了不符合独立交易原则的关联方交易及海外避税地受控外国公司两类情形,并包括了通过不具有合理商业目的安排获取不当税收利益的一般反避税条款。

明确非居民个人征税办法。主要包括按月按次分项计税以及应税额计算方法。

新法实施“两步走”。第一步:2018年10月1日开始实施新的税率表,进行分类计税,工资薪金起征额调整至5000元/月。第二步:修正后的个人所得税法于2019年1月1日全面实施。

注意要点:全国人大官网显示,在征求意见开始后的仅一天时间里,已经征集到近两万条意见,足以显示人们对个税修法关注度之高。公开征求意见结束后,视情况可能会对修正案草案进一步修改审议。“两步走”计划是否能按时实施,取决于何时通过审议。此外,新法的顺利实施需要配套法规和措施的同步跟进,例如税法实施条例的修订、专项附加扣除及预缴扣缴办法等相关具体规定的出台。

Following the 1st review of the Draft Amendment to the Individual Income Tax Law (“IIT Law”) of the People’s Republic of China (the “Draft Amendment”) during the Third Session of the Standing Committee of the 13th National People’s Congress (“NPC”), the Draft Amendment has been posted on NPC’s website on June 29th, 2018, for soliciting public opinion till July 28th, 2018.
 

From our study of the complete version of the Draft Amendment, we have gained a more thorough understanding of the proposed IIT reform. Details of the Draft Amendment’s key points are shared as follows:

BT 201809 Finance 02In detail

Comprehensive Income and Business Operation Income Tax Rate

The Draft Amendment has replaced the two tax tables currently applicable to employment income, income derived from production and operation income of individual industrial and commercial households as well as income from contractual and leasing operation, with one tax table that covers both comprehensive income and business operation income.
 

The new tax table has adopted the employment income’s 7-bracket progressive tax rates of 3% to 45%. Please refer to Appendix 1 for comparing the changes to the adjusted taxable income brackets, especially lowering of income levels subject to tax rates of 25% and below.
 

Based on the proposed comprehensive tax rates and without considering the specific additional deductions, there would be a 60% projected reduction to tax payable of individuals with RMB10,000 monthly salary, 50% for those individuals with RMB20,000 monthly salary and approximately RMB2,300 for those individuals with RMB85,000 or more. Each salary earner can benefit from the proposed changes and the reduction of tax burden to those at mid-income level is particularly notable.
 

Tax rates applicable to business operation income follow the current 5-bracket progressive tax rates of 5% to 35% used for income derived from production and business operations by individual industrial and commercial households. However, the income band of each tax bracket has been expanded substantially. These changes are intended to keep pace with the social and economic development trends; facilitating the overall reduction of this income category’s tax burden. Please refer to Appendix 2 for the proposed tax table for business operation income.
 

IIT Collection and Administration System Reform, a New Start Applicable To Comprehensive Income

As mentioned previously, the new aggregate taxation model would definitely require corresponding transformation of the current IIT collection and administration system. A taxation system which includes both monthly withholding of comprehensive income tax and annual reconciliation with tax refund or additional tax payable anticipated by us is evidenced in the Draft Amendment. Moreover, the Draft Amendment includes key changes to the principal features of the IIT collection and administration system such as those outlined below:
 

Unique Taxpayer Identification Number
It is indicated in the Draft Amendment that “one taxpayer, one number” is the basis for developing a modern IIT collection and administration system; an important role for the long-term reform.
 

Revising the Obligation of Taxpayer and Withholding Agent
Although there is no change to the basic obligation of taxpayers and withholding agents in the Draft Amendment, nevertheless there are a few rules worthy of attention.
 

• Self-reporting obligation of taxpayer
Please refer to Appendix 3 for a comparison of changes to the taxpayers’ self-reporting obligation and our brief comment.
 

• Obligation of the withholding agents paying comprehensive income
The Draft Amendment clearly confirms withholding agents of comprehensive income are still liable for the withholding obligation per month or per payment. It also stipulates that with the specific allowable additional deductions information provided by taxpayers, withholding agents should not refuse to deduct them as part of the tax withholding. In other words, claiming of certain specific additional deductions do not have to wait until the annual reconciliation, they can be deducted when performing the monthly tax withholding.
 

For the four categories under comprehensive income, the specific additional deductions can be claimed as part of the tax withholding. This may increase the tax withholding agent’s responsibility and the complexity of the work involved, especially the burden of large enterprises. Moreover, confidentiality is a concern to some specific additional deductions (e.g. dependents’ education, continued education, medical treatment of major illness, mortgage interest/rental expense, etc.). How to balance the obligation, liability and rights between the taxpayers and withholding agents? These are questions to be considered when the tax withholding and tax advance payment methods are published.

BT 201809 Finance 03Tax withholding/filing due dates
Summarized in Appendix 4 are the due dates for various tax withholdings/filings stated in the Draft Amendment.
 

Annual reconciliation of comprehensive income is probably the item concerning many individuals, and every March to June would become taxpayers’ “tax season”.
 

Legal Safeguard of IIT Collection and Administration
Under the current tax rules, the Administrative Law of the People's Republic of China on the Tax Revenue Collection (“Administrative Law”) governs the IIT collection and administration plus provides the legal basis and safeguard. To address the new requirements of the IIT reform and its administration rules, the Draft Amendment includes articles covering tax refund related to year-end reconciliation, information sharing across government departments, incentive and penalty linked to credit information system for a more comprehensive and effective IIT system. In particular, Article 8 of the Draft Amendment has specified the relevant requirements for the verification and inspection of individual’s transfer of real estate and equity transactions.
 

Anti-Avoidance Rule
Article 8 of the Draft Amendment is a newly added one on tax avoidance, the scenarios cited include transactions not meeting the arm’s length principle, foreign tax haven entities controlled by individuals, plus deriving inappropriate tax benefits without reasonable commercial substance. This is another new introduction to the IIT Law which warrants attention from both enterprises and individuals.
 

Taxation of Non-Resident
As previously mentioned, the Draft Amendment has revised the definition of “resident” and “non-resident” stated in the relevant IIT regulations involving taxation of foreigners. Taxation of non-residents (those who do not spend more than 183 days in China during a tax year) has been clarified as below:
 

• Non-resident receiving comprehensive income is liable to tax per month or per payment, i.e. annual reconciliation of comprehensive income approach is not applicable to non-resident;
 

• Non-resident is not eligible to claim specific additional deductions, i.e. taxable employment income is the amount net of the RMB5,000 monthly basic deduction, plus no deduction is allowed for income derived from remuneration for personal services, income derived from remuneration for manuscripts and income derived from royalties.
 

Two-Step Implementation of the New IIT Law
It is worth mentioning that the new IIT law would be implemented in two phases:
 

Phase 1:
Effective from October 1st, 2018, the new tax rates table would be implemented for taxable employment income, and income derived from production and business operations by individual industrial and commercial households plus income derived from contractual or leasing operations of enterprises or institutions. In addition, the new standard basic deduction (RMB5,000 per month as currently proposed) would likely be implemented in Phase 1.
 

Phase 2:
The overall implementation of the amended IIT Law would be effective from January 1st, 2019.
 

The Takeaway

The due date of the public comments submission for the Draft Amendment is July 28th. Nearly 20,000 comments have been submitted on the first day according to the NPC website. This indicates the IIT reform has attracted high level of attention from people and also the extent of its impact is large.
 

According to the legislative process, after the public comment, further revision could be made to the Draft Amendment before its submission to the Thirteenth NPC’s review. Whether the proposed two-phase implementation plan can be rolled out as scheduled, it is subject to the final review of the Standing Committee.
 

In addition, smooth implementation of the new IIT Law would require the support of corresponding rules and procedures. For example, the revision of tax implementation rules, detailed rules related to specific additional deductions and tax withholding, etc.
 

Appendix 1:Proposed Tax Table for “Comprehensive Income”

BT 201809 Finance 04BT 201809 Finance 05

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