On 20 October 2018, the Ministry of Finance and the State Administration of Taxation released the Draft PRC individual income tax (“IIT”) implementation rules and Draft measures on PRC IIT itemised deductions (hereafter referred to as “the Drafts”) seeking consultation from the public. The public consultation program closes on 4 November 2018.
The Drafts introduced detailed rules for implantation of the new PRC IIT law and administration of itemised deductions under the new regime.
Salient points for respective taxpayer groups have been prepared based on the Drafts, which remain subject to change.
PRC domicile will continue to be assessed based on an individual's household registration, family ties or economic ties with the PRC.
Five-year rule will be retained
Tax-exempt benefits will be retained
Certain terms defined and relevant rules are established for related party transactions, controlled foreign corporation in preparation for general anti-avoidance rule (hereafter referred to as “GAAR”) implementation.
Related party transactions
Controlled Foreign Corporation (“CFC”) rule
Personal exchange of non-monetary assets, assets donation, debt repayment, sponsorship, investment will be deemed as assets disposal and therefore be subject to PRC IIT. This is regardless of the relationship between the transaction parties.
Cancelation of PRC household registration due to overseas immigration
Resident individuals would be required to complete all necessary tax reconciliation filings due for the year of departure and obtain tax clearance prior to cancelation of PRC household registration.
Documentation requirement on itemised deductions
Withholding agent’s duty of care
The release of the Drafts embody Premier Li's commitment to maintain stability in policy implementation. Retaining the five year rule and tax concessions on fringe benefits should significantly reduce concerns of foreign individuals and their employers, and position China competitively to continue to attract and retain foreign talents.
The five-year concession will remain to keep foreigners without a domicile in China from becoming taxable on worldwide income. Although residence will be triggered based on 183 days, a single break in excess of 30 days will continue to create a “tax break” for these purposes. We anticipate that “domicile” may come under greater scrutiny going forward and that eligibility for the exemption on foreign sourced income may need to be validated through a "put-on-record" filing. Furthermore, whether the new tax break should be completed within the same calendar year remains questionable. Whether the single break in excess of 30 days need to be completed within the same calendar year as is required under the existing rules is still unclear.
PRC resident taxpayers and their employers
Administration of itemised deductions under the new regime will be simplified and will not unnecessarily increase the administrative burden of employers. Employees can claim itemised deduction either by providing details to their employer via monthly withholding tax return filing or via annual reconciliation tax return filing. Details of those expenditures which are of recurring nature (such as rental), for the first time claim, shall be notified to the withholding agent, and any subsequent changes should also be notified to the employer should the employee wishes to claim the itemised deductions via monthly withholding tax return filing. The drafts make it clear that individuals are responsible for accuracy of information submitted for tax deduction claims.
Despite the above, article 25 of the Draft - measures on PRC IIT itemised deductions also imposes a duty of care on employers. If false / error claims are discovered in the administration process, employer should remind their employees to correct the claims and to notify tax authority if the individual concerned refuses to make the corrections. Furthermore, articles 41 and 42 of the Draft PRC IIT implementation rules also require the withholding agent to retain the relevant tax documents for tax audit purpose, and they will be notified by the tax authority if the authority discover the false / error claims of the taxpayers. These requirements will put some onus on employers to verify certain claims and track itemised deduction limits. As such, it is recommended that corresponding internal administration policy relating to the IIT reform be established and communicated to employees well before 1 January 2019.
High net-worth individuals
The Drafts confirm that the approach of the IIT GAAR will be similar to corporate tax but still leaves some areas of doubt. Application of GAAR is complex and rules need to evolve over time to customise to personal and family situation as opposed to that of corporations / commercial. High-net worth individuals who are domiciled in China should familiarise themselves with the GAAR policy, review their global investment portfolio deployment and strategy, and historic tax compliance status, in order to manage any risks of being asserted as being non-compliant.
|Item||Key qualifying conditions||Annual standard fixed amount for deduction (RMB)||Who can claim?|
|Children’s education||Pre-school||3 years onwards||12,000||50% for each parent / 100% for either parent|
|Compulsory education||Primary & middle school|
|Intermediate education||High school, Vocational school|
|Higher education||Degree, Masters, Doctorate|
|Further education||Formal education||As per above levels of education||4,800||Individual taxpayers|
|Professional education||Technical / professional certificates||3,600|
|Serious illness medical fees||Medical expenses > RMB 15,000||Actual expense not exceeding 60,000||Individual taxpayers|
|Mortgage interest||Limited to first property only||12,000*||If jointly owned, either husband or wife to claim|
|Housing rental||Not owning property in place of work||Big cities||14,400*||If joint rental, either husband or wife to claim|
|Mid-size (population) > 1m||12,000*
|Smaller (population) < 1m||9,600*|
|Supporting elderly||60 years or older parents or other obligations by law||Single child||24,000||Split between siblings: maximum claim is 1,000 per month for any person|
|Not single child||12,000|
* Where actual expenditures incurred on mortgage interest and housing rental are less than the prescribed standard fixed amount, whether the actual expense amount incurred or the standard fixed amount should be deducted should be further clarified.
If you have any questions on the above, KPMG will be pleased to assist and provide relevant guidance and assist accordingly.