There is a common misconception that Individual Income Tax in China is very heavy, which may have the effect of deterring overseas professionals from working in China. The impression that China tax is heavy may have been influenced by the fact that the top marginal tax rate in China on salaries and wages earned by individuals had remained at 45 percent for several decades. However, the IIT burdens for most employees have been substantially reduced, following the full implementation of the amended IIT Law (the “Current IIT Law”) on Jan 1, 2019.
Under the Current IIT Law, while the top marginal tax rate of 45 percent remains unchanged, tax bands for lower income levels have been broadened with a view to reducing tax burdens for employees, especially those earning salaries below 40,000 yuan ($6,278) per month. The increase in disposable income of middle class has enabled China to rely more on domestic consumption and less on exports to maintain its strong GDP growth.
The following table compares the previous and current tax bands and tax rates on salaries and wages:
In addition, the Current IIT Law also allows a standard deduction (or personal tax allowance) of 5,000 yuan per month, up from 3,500 yuan per month. It also offers a basket of Additional Special Deductions covering children’s education, continued education, serious illness medical treatment, housing loan interest and housing rent, as well as allowances for supporting elderly dependents. These deductions and allowances help reduce employees’ taxable income and their tax bills.
For an employee who earns a salary of 30,000 yuan per month and is entitled to the standard deduction only, ignoring social security deductions, his IIT liability under the Current IIT Law would be 3,590 yuan per month. Before the implementation of the Current IIT Law, the same salary would have attracted an IIT of 5,620 yuan. This translates to a reduction in the effective tax rate from 18.7 percent to 12 percent.
If the same employee earned 100,000 yuan per month instead, with other assumptions unchanged, his IIT liability in the current regime would be 27,590 yuan per month (effective tax rate: 27.6 percent). This is reduced from the pre-2019 liability of 29,920 yuan (effective tax rate: 29.9 percent).
By international standards, effective tax rates of 12 percent for those earning 30,000 yuan per month and 27.6 percent for those earning 100,000 yuan per month cannot be considered burdensome. The corresponding rates for employees working in Australia, Canada and the United Kingdom are higher. For example, an individual who receives a monthly salary of 30,000 yuan with standard deductions would be taxed at effective tax rates of about 20 percent, 19 percent and 14 percent respectively for these jurisdictions. For a monthly salary of 100,000 yuan the effective tax rates would be about 33 percent, 37 percent and 31 percent respectively.
In addition, China has signed bilateral tax treaties on income and capital with over 100 tax jurisdictions. Foreigners from these jurisdictions who work in China will be protected by such treaties to ensure that they would not be subject to double taxation. Tax residents of these jurisdictions would generally only pay IIT on income sourced in China. In other words, their overseas interest, dividends and rental income would not be subject to IIT while they are working in China.
In some special areas in China such as the Greater Bay Area, tax rebates are available to qualified foreigners so that IIT payable on their salaries and bonuses would not exceed 15 percent. Individuals from Hong Kong, Macau and Taiwan are considered “foreigners” for tax and social security contributions (SSC) purposes. They may also be exempt from making contributions to certain elements of SSC so that they can enjoy higher disposable income while they work in China.
In summary, the fear that employees in China pay high taxes is unfounded. The Current IIT Law has made China a very competitive jurisdiction to attract and retain foreign and local professionals.
The author is a member of the 13th CPPCC National Committee and past president of the Taxation Institute of Hong Kong.