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Hawksford: Annual IIT reconciliation filing and non-taxable allowances
The new Regulations for the Implementation of the Individual Income Tax Law of the PRC, which came into force on the 1st of January 2019, have not only changed the computation method of China’s Individual Income Tax (hereinafter referred to as ‘IIT’) but have also introduced new income categories and the yearly reconciliation timeframe. As this is now the second year of implementation of the IIT reform, it’s time for individuals to complete their annual IIT reconciliation filing for 2020.
In this article, we will go through the key requirements of the IIT regulation and also draw attention to the consequences for individuals and companies after a three-year transition period ends in December 2021 for the tax-free allowances for foreign employees and the special taxation on yearly bonuses. Both changes will significantly increase the tax burden of individuals and/or companies and there’s no better solution than facing all the available scenarios in advance.
Annual Reconciliation Filing
As applied in the last fiscal year, individuals shall pay IIT on the five income categories listed below:
- Comprehensive income,
- Business income (e.g., leasing and other personal services),
- Income from interest/stock/dividends,
- Income from leasing/the conveyance of property,
- Contingent income (other types of income).
Comprehensive income, which was previously limited to salaries and wages, consolidates salaries and wages, income from labour services, income from manuscript remuneration, and income from royalties under the same progressive tax treatment, with seven tax brackets and corresponding rates ranging from 3% to 45%.
The IIT calculation method is based on a cumulative and progressive rate that takes into consideration the total income generated over the year, rather than during each month, although the IIT payment is due on a monthly basis.
By the 30th of June each year, all China-resident taxpayers shall submit the IIT reconciliation for the previous year in order to confirm that the IIT prepaid during the year matches the income generated over the same period and, in case of any discrepancy, to rectify the difference.
The latest regulations identify three types of situations in which taxpayers are exempt from yearly IIT reconciliation:
- Individuals whose yearly comprehensive income is below RMB 120,000,
- Cases in which the supplementary IIT to be paid by the year end does not exceed RMB 400,
- Cases where the total IIT prepaid during the year and the amount payable by the year end match or if the taxpayer voluntarily gives up on the IIT refund (in the event that the IIT prepaid during the year exceeds the amount payable by the year end).
IIT yearly reconciliation procedures play a key role in ensuring that the IIT prepaid during the year matches the total tax payable calculated via the yearly overall individual income, especially in situations where more than one source of income coexists and/or employees have changed employer during the same financial year.
Individual taxpayers have the statutory obligation to complete the IIT reconciliation based on their cumulative income for the year (unless belonging to one of the exempt categories mentioned above) and are responsible for covering any difference in the final IIT calculation (i.e., to arrange a top-up or a refund).
Employers shall be responsible only for the calculation and declaration of the IIT generated via their own business-related activities (i.e., during the provision of wages and salaries).
At the beginning of 2021, the State Taxation Administration released an announcement related to this year’s IIT filing with clarifications on the implementation of the rules and their interpretation, which differ slightly from 2020 as it now emphasises that the responsibility lies with the individual employee.
How to Proceed With Annual IIT Reconciliation
The 2020 IIT filing can be submitted from the 1st of March and no later than the 30th of June 2021.
There are three ways for taxpayers to proceed with the annual IIT reconciliation:
- Taxpayers can undertake the yearly reconciliation independently.
- Employers can undertake the reconciliation for their employees upon collection of all the relevant information and the signing of a disclaimer. However, the employer shall not handle the annual final settlement on behalf of the taxpayer unless this is confirmed officially. Employers shall otherwise train or direct the taxpayer to complete the filing and, eventually, the tax refund through the online tax administration (which can include the IIT app on the individual’s mobile phone).
- Taxpayers can appoint a trusted third-party professional to undertake the reconciliation on their behalf.
Tax authorities have rolled out an official app (个人所得税) with the aim to simplify the reconciliation procedure in a user-friendly app that is available for all taxpayers.
Considering that the app is a relatively new tool for tax monitoring and management, it is available in only one version for both Chinese nationals and foreigners. The latter must have a mainland Chinese phone number and will have to visit their local tax bureau to collect a tax identification number which can be used in lieu of the unique code available on Chinese ID used by Chinese nationals to log in to the app.
Although taxpayers bear the ultimate responsibility from the perspective of the tax authorities for the IIT being settled at the year end, taxpayers can delegate their employers (acting as withholding IIT agents during the year) or a professional trusted third party to carry out the reconciliation on their behalf by signing a relevant power of attorney to be used upon declaration.
Moreover, taxpayers bear the ultimate responsibility for the authenticity and completeness of the information submitted. The fines for omissions or late filing have a direct impact on the personal credit rating of the individual who, therefore, should be fully aware of and knowledgeable towards individual tax compliance matters.
All supporting documents and data should also be kept by the taxpayer in case of any tax inspection in the future. Alternatively, the withholding agent should assist the taxpayer in completing the reconciliation filing by providing the necessary information and handling the process, if requested.
