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New IIT: Double Taxation Avoided in New Employment Income Arrangements
Effective from 1 June 2012, the new Individual Income Tax (IIT) Arrangement between mainland China and Hong Kong, Special Administrative Regions (SAR) & Macao (hereafter referred to as CN, HK, MAC and Arrangements) was implemented to avoid double taxation between the respective locations. The arrangements have also revised the IIT implications on some HK and MAC tax residents in CN. Taxand China introduces the general implications of this arrangement and benefits for taxpayers.
General Application of the Arrangements
The arrangements mainly list the following requirements regarding relevant IIT calculations and compliance procedures:
- Applicable status: The arrangements are applicable to the employment income only of tax residents of HK and MAC, and when tax residents are under employment in HK or MAC, or multiple positions in CN and HK/MAC. HK or MAC tax residents who are only under CN employment will not follow the arrangements.
According to Chinese IIT Law, a non-Chinese individual will become a Chinese tax resident if he / she stays in China for one full calendar year, and that the "one full calendar year" does not fall within the application of the arrangements. The 'one-year period' can include a single trip, not exceeding 30 days, or multiple trips not exceeding 90 in aggregate (Temporary Absences) - these will be deemed as effective stays in the CN and will not be deducted for the purpose of determining the tax residence status.
- Implementation of the Relevant Provisions and Tax Computation Approaches of the Provisions on Employment Income in the Arrangements: As the relevant term is in "dependent personal service" in the Double Tax Treaty (DTT) between CN vs. HK and CN vs. MAC, if a HK or MAC resident is present in CN for any period(s) exceeding in aggregate 183 days in any 12-months, the income from employment of the resident for his relevant services provided during his stay in CN, shall be subject to IIT in CN only. Conversely, if a HK or MAC resident is present in CN for a period or periods NOT exceeding aggregate 183 days in any 12 month period, the income from employment of HK or MAC residents may be exempted from tax in CN, provided certain conditions are satisfied.
- Treatment of Bonus - One-lump Income of Different Taxable Periods: Different forms of remuneration such as bonus, salary and dividends of different taxable periods paid to a HK or MAC resident in one lump shall be subject to IIT in accordance with the new legislation. For the application of the new agreement, the "number of days actually stayed onshore" refers to the number of days actually stayed during the Bonus assessed period; and the "number of calendar days of the current period" refers to the total number of calendar days during the same period.
Where are the changes?
A. Number of days actually stayed onshore vs. Number of days working onshore
The Arrangement has introduced different wording in the "Number of days actually stayed onshore" - referring to the number of days when a HK or MAC resident actually (physically) stayed in CN during the period. The previous policy's wording included public holidays, individual holidays and training days within or outside of CN when working under a Chinese assignment. This amendment is designed to mitigate double taxation under the previous CN and HK IIT systems.
Days of entry and exit shall now be regarded as a half day of actual stay, as opposed to one day, previously.
B. Taxable wages for less than 1 month
In the previous regime, wages that were calculated on a daily basis were multiplied by the number of days in the month to form the monthly net wage when calculating the income tax. Now, under the new Arrangements, the "less than 1 month wages" is not required to be converted into full month wage as part of the IIT calculation.
C. Treatment on Bonus
Under the old treatment, only the part of a bonus that the residents receive from the months of their service in China would be subject to IIT, after relevant evidence is provided for verification. The method was "time apportionment first, tax calculation later". Under the new treatment, the bonus will be taxed as wages based on the new formulas, accordingly it will become "tax calculation first, time apportionment later".
Please note that due to the progressive applicable rates, the new bonus treatment may lead the HK/MAC residents to pay either more or less IIT in China, depending on the actual situation of the residents. Should the resident find themselves needing to pay more IIT than under the previous policy, he/she is unable to waive the new policy.
Record-filing and Reporting: With the above in mind, it should be noted that at the time of applying the relevant preferential treatment of the arrangements, HK and MAC residents should file for record with competent tax authorities in accordance with the relevant provisions in the Administrative Measures on Tax Convention Treatments for Non-Residents.
To ensure compliance, companies that have tax residents under the employment in HK or MAC or multiple positions in CN and HK/MAC, will need to be aware of the new tax calculation formula and the new method of calculating days in China and treatment on bonuses.
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