Focus on the tax impacts brought by social insurance to expatriates

1. DRAFT FOR DISCUSSION
R p r o P CI
eo t n R I T
D raft
M arch 1 7, 201 0

2. The information and data quoted in this report are mainly
from KPMG online resources and Winlaw search engine
Winlaw 国家法规数据库
KPMG
–State Tax
• 2009: 国税发（２００９）８５号
• 2007: 国税函（２００７）４０３号
–Tax 060210 IIT • 2006: 国税函（２００６）５８号
• 2005: 国税发〔２００５〕１２０号
advice • 2004: 国税发（２００４）２７号 / ２９号 / ８０号 / ８０８号
• 2003: 国发（２００３）５号
• 2001: 国税函（２００１）３３６号
–Regulation • 2000: 国税发（２０００）７８号
Tracking • 1998: 国税发（１９９８）４７号 / １０１号
• 1997: 财税字（１９９７）５４号 / １４４号
System (RTS) • 1996: 国税发（１９９６）２１４号
• 1995: 财税字（１９９５）９８号
–BJIS Space • 1994: 国税函发（１９９４）０２０号 / １４８号 / ４４０号
• 1993 : 国税发（１９９３）０４５号
• 1990: 国税函发（１９９０）３４５号
• 1988: （８８）国税外字１７０号 / （８８）财税外０２１号
–Local Tax

3. T d y o j c iv s
o a ’s b e t e
- PRC IIT in brief
• General IIT rules
• IIT im p lication on th e e xp atriate
- P R C IIT re gu lation s tatu s
- Im p act to M u ltinational C orp orate

4. P C I l wd id sin iv u l in ot o
R I a iv e d id a s t w
T
g o p , e c o w ic h st os b
r us ah f h h a w u-
gop
r us Resident
Resident Taxpayer(2)
Taxpayer(1)
Non–resident
–Have domicile
Taxpayer(2)
Non–resident in China
Taxpayer(1) –Without domicile
–Not domiciled but have
and reside for resided for one
–Neither domicile less than one year* or more in –Taxable income:
year in China China derived
from
sources within
–Taxable income:
and outside
derived from
nor resident China
sources
in China within and outside
–Taxable income: China
* If an individual has a single absence exceeding 30 days or multiple absences exceeding a cumulative total of 90 days
–Taxablewithin a calendar year, thatderived be considered as one full year.
from China income: year will not
derived from
Source: Individual Income Tax Law Of The People’s Republic Of China (Standing Committee, National People's Congress: 29 December
from
2007) sources within

5. Dif e e t r mr v n e a e I , P C I isd s n d
frn fo ee u - sdI R I
b T T e ig e
s p r t l f rin o ef o t ef l o in s u c s
e a aey o c m r m h o l w g o r e,
a w l a t e d d c ib e a dt x a e
s e l s h ir e u t l s n a r t
• Deductibles • Tax rate
–Fixed amount –9-level excess
• Wage and salaries (RMB2,000 or 4,800) progressive tax rate
–Social insurance
• Production or –Fixed amount –5-level excess
operation by
(RMB2,000) progressive tax rate
individual business
–Reasonable cost
• Contracted or
leased operation of –Fixed amount –5-level excess
enterprises or (RMB2,000)
progressive tax rate
institutions –Reasonable cost
• remuneration for –Fixed amount(RMB800)
–3-level excess
personal service or percentage(20%) progressive tax rate
• author's –Fixed amount(RMB800) – 14%
remuneration or percentage(20%)
Source: Individual Income Tax Law Of The People’s Republic Of China (Standing Committee, National People's Congress: 29 December
2007)

6. ( n in e )
Co t u d
• Deductibles • Tax rate
–Fixed amount(RMB800) – 20%
• royalties or percentage(20%)
• interest, dividends –No deductibles – 20%
and bonuses
–Fixed amount(RMB800)
or percentage(20%) – 20%
• lease of property
–Tax
–Repair cost (≤RMB800)
• transfer of –Original value
– 20%
property
–Reasonable cost
• contingent income –No deductibles – 20%
Source: Individual Income Tax Law Of The People’s Republic Of China (Standing Committee, National People's Congress: 29 December
2007)

7. T d y o j c iv s
o a ’s b e t e
- P R C IIT in b rie f
• G e ne ral IIT ru le s
• IIT implication on the expatriate
- P R C IIT re gu lation s tatu s
- Im p act to M u ltinational C orp orate

8. According to the relevant PRC IIT law, there are several special
clauses to define expatriates’ individual income tax, and the focus
mainly are on two aspects: time and deduction
•Time •Deduction
The length of PRC IIT law defines
working period in several special
China is a key allowances for
element to define expatriates* to be
the scope of exempted before tax.
taxable income.
•Taxable income
* Expatriates, for this purpose, include foreign nationals, Taiwan nationals and residents of Hong Kong
and Macau.
Source: Individual Income Tax Law Of The People’s Republic Of China (Standing Committee, National People's Congress: 29 December 8
2007)

9. We will discuss in this section the IIT implications on employment income in
respect of the following four categories of expatriate working in the PRC
• Income sourced within China • Income sourced out of China
Stay in China for •Paid by •Paid by •Paid by •Paid by
domestic entity foreign entity domestic entity foreign entity
•less than
183(90)* days Taxable Exempted Non-taxable Non-taxable
•over 183(90)
days but less Taxable Taxable Non-taxable Non-taxable
than one year
•over one year
but less than Taxable Taxable Taxable Exempted
five years
•over five Taxable Taxable Taxable Taxable
years
* For expatriates from the country that has avoidance of double tax arrangements with China, the time line is defined as
183 days. However for those from the country that has no such arrangement with China, the time line should be set as 90
days.
Source: Individual Income Tax Law Of The People’s Republic Of China (Standing Committee, National People's Congress: 29 December 2007)

10. (continued-1)
• calculation
Stay in China for Monthly Aggregate number
Total monthly
remuneration borne remuneration borne of days stayed in
by entity inside the the PRC during the
•less than by entities inside or Applicable Quick
X - PRC month
outside the PRC Deduction X X
183(90)* days less standard
IIT rate Total monthly Total number of
personal remuneration borne days in the month
allowance(RMB4,800) by entity inside or
outside the PRC for
the month
Total monthly Monthly
remuneration borne remuneration borne
•over 183(90) by entities inside or Applicable Quick by entity inside the
days but less outside the PRC X
IIT rate
-
Deduction X
PRC
Total monthly
than one year less standard
remuneration borne
personal
allowance(RMB4,800) by entity inside or
outside the PRC for
the month
Source: Individual Income Tax Law Of The People’s Republic Of China (Standing Committee, National People's Congress: 29 December
2007) 10

11. (continued-2)
• calculation
Stay in China for Monthly Aggregate number
Total monthly
remuneration borne remuneration borne of days stayed in
by entity inside the the PRC during the
•over one by entities inside or Applicable Quick
X - PRC month
outside the PRC Deduction X 1- X
year but less less standard
IIT rate Total monthly Total number of
than five personal remuneration borne days in the month
by entity inside or
years allowance(RMB4,800)
outside the PRC for
the month
Total monthly
remuneration borne
by entities inside or Applicable Quick
•over five outside the PRC X -
IIT rate Deduction
years less standard
personal
allowance(RMB4,800)
Source: Individual Income Tax Law Of The People’s Republic Of China (Standing Committee, National People's Congress: 29 December
2007) 11

12. In accordance with the PRC IIT law, certain reimbursement expenses
in relation to the foreigner’s expatriation to China can be claimed as
non-taxable if the amounts are substantiated with valid invoices
Compensation Item Note & Description Comment
Temporary living Temporary living costs include hotel Not taxable if supported by official
accommodation, laundry and meals (before invoices.
moving into a rented apartment) are
reimbursed by the employer.
Meal allowance Actual meals provided by employer or Not taxable
reimbursements for actual meal costs
supported by official invoices. However, a
monthly payment at a fixed amount is
Laundry expenses Laundry expenses are reimbursed by the employer Not taxable if supported by official
taxable.
invoices.
Settling-in allowance / One-off payment upon arrival in China. Taxable except for actual amounts
Relocation allowances spent on relocation costs and
supported by official invoices.
Shipment of personal The employer will pay the logistics company Not taxable.
belongings directly for shipment expenses.
Arrival passage Travel costs from the home country to China for May be treated as non-taxable
expatriates and their family members to start relocation costs at the time of
the PRC assignment will be borne by the expatriation/repatriation.
employer. At the time of repatriation, similar
costs will also be borne by the employer.
12
Source: KPMG TAX IIT advice

13. (continued-1)
Compensation Item Note & Description Comment
School / Education School / education expenses in the PRC for Not taxable if supported by official
expenses children are reimbursed by the employer. invoices.
Club fees The employer will pay the entrance fee and the Not taxable if the club membership
membership fee. is used primarily for business
purposes and is supported by
official invoices.
Signature bonus Lump-sum payment upon the commencement of Strictly, taxable as PRC source
PRC assignment. income.
However, if structured as the
completion bonus of
assignment before coming to
China, it could be considered
as unrelated to the PRC
assignment and therefore non-
taxable in PRC.
Completion bonus Lump-sum payment upon the completion of PRC Strictly, taxable as PRC source
assignment. income.
However, if paid after the PRC
assignment and not charged to
China, it may not be pursued
by some tax authorities as it
could be considered as
unrelated to the PRC
assignment.
Language training expense The employer pay the language training expenses Non-taxable if the training could be
incurred by the expatriate in the PRC supported by official invoices.
Source: KPMG TAX IIT advice

14. T d y o j c iv s
o a ’s b e t e
- C h ina IIT in b rie f
• G e ne ral IIT ru le s
• IIT im p lication on th e e xp atriate
- C hina IIT regulation s tatus
- Im p act to M u ltinational C orp orate

15. Base on documents published during year 1988 to year
2010 , the regulation for expatriates’ PRC IIT shows
three characteristics
– Cancelled some review and
•Simplized approval procedures acted by the
procedure tax bureau, like for meal allowance,
etc..
• More
– Cooperate with other departments, convenient
•Dynamic like Exit-Entry Administration, and effective
information Foreign Exchange Administration, regulation in
etc., to get expatriates’ income
future
information from multiple channels
– Asked employer to build tax file for
•Personal expatriates and disclose relevant
tax file information as such name, arrival
and departure time, income, etc..
Source: 国家税务总局关于取消及下放外商投资企业和外国企业以及外籍个人若干税务行政审批项目的后续管理问题的
通知 [ 国税发（２００４）８０号 ]
国家税务总局关于加强税种征管促进堵漏增收的若干意见 [ 国税发（２００９）８５号 ]
国家税务总局关于加强外籍人员个人所得税档案资料管理的通知 [ 国税函（２００６）５８号 ]

16. T d y o j c iv s
o a ’s b e t e
- C h ina IIT in b rie f
• G e ne ral IIT ru le s
• IIT im p lication on th e e xp atriate
- C h ina IIT re gu lation s tatu s
- Impact to Multinational C orporate

17. Based on the clauses of PRC IIT regulation, insurance fee
for expatriates listed as below has options to be or not to
be exempted before IIT As social Deductible only if not listed
insurance as costs or expenses, and
(employer’s not exempted before
duty) corporate income tax
Paid to As social
insurance
foreign (employee’s Un-deductible
insurer duty)
Supplementary Un-deductible
insurance
Insurance
fee
Saving plan or
annuity
Paid to Deductible only if not listed
Group life
domestic insurance
as costs or expenses, and
not exempted before
insurer corporate income tax
* Other medical insurance, including dental insurance
fee, should be review and approval by the tax bureau, Other medical
and must be in accordance with company’s benefit
plan under a reasonable limit. insurance*
Source: 国家税务局关于对外籍雇员若干所得项目征免个人所得税问题的通知 [ 国税函发（１９９０）３４５号 ]
国家税务总局关于外商投资企业和外国企业的雇员的境外保险费有关所得税处理问题的通知 [ 国税发（１９９８）１０１号
]

18. So, what is the trigger for this option? Assume there is such a
company whose expatriates number is x , and for each expatriate
the company paid insurance fee at the level of p
If paid to foreign insurer If paid to domestic insurer
-As s u m p tions : -As s u m p tions :
• O nly a p e rce ntage of p can b e •O nly a p e rce ntage of p can b e
cou nte d as s ocial ins u rance , th e cou nte d as s ocial ins u rance , th e
re s t will b e u n-d e d u ctib le ; re s t will b e u n-d e d u ctib le ;
• With in s ocial ins u rance ap , th e •the applicable IIT rate would be
e m p loye r’s d u ty is b p e rce ntage , n
and e m p loye e will afford th e re s t
(1-b).
• the applicable IIT rate would be
n

19. (continued-1) Two different circumstances come to a same conclusion:
A greater-than-25% applicable IIT rate will pull the trigger. In another word, the
drive comes when expatriates’ wage is greater than RMB20,000 per month
If paid to foreign insurer If paid to domestic insurer
-If th e com p any ch oos e not to -If th e com p any ch oos e not to
e xe m p te d ins u rance fe e b e fore e xe m p te d ins u rance fe e b e fore
corp orate incom e tax : corp orate incom e tax :
•ΔC IT F = · x· a· b· p ≥ 0
25% •ΔC IT D = · x· a· p ≥ 0
25%
•ΔIIT F = -n· x· a· b· p ≤ 0 •ΔIIT D = -n· x· a· p ≤ 0
•ΔTotal =
F
ΔC IT+ ΔIIT •ΔTotal =
D
ΔC IT+ ΔIIT
=(25%- =(25%-
n )· x· a· b· p n )· x· a· p
if ΔTotalF ≤ 0 , the
•O nly if ΔTotalD ≤ 0 , the
•O nly
company’s choice will be company’s choice will be
reasonable. So, the IIT reasonable. So, the IIT
applicable rate a ≥ 25%. applicable rate a ≥ 25%.

20. Compare with the equals under each circumstance,
there is another conclusion:
If paid to foreign insurer If paid to domestic insurer
•ΔTotal =
F
ΔC IT F + ΔIIT F •ΔTotal =
D
ΔC IT+ ΔIIT D
=(25%- =(25%-
n )· x· a· b· p n )· x· a· p
•As d e fine d in th e •A re as onab le e ntity will
as s u m p tions , b is a op tim ize h is ch oice with in
p e rce ntage , s m alle r th an 1 . ce rtain cons trains . In th is
S o, cas e its goal will b e
avoid ing m ore tax d u ty,
•∵ΔTotalF = b· ΔTotalD wh ich m e ans ch oos ing
•∴ΔTotalF ≤ ΔTotalD d om e s tic ins u rance
ch anne l is a b e tte r s h ot.