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Beijing Tax Bureau's report on Foreign individual income tax payments
Initial results of the Beijing Municipal Tax Bureau's audit of individual
income tax payments by foreign employees of foreign representative
offices registered in Beijing were reported last month.
The audits were part of a crackdown on representative
offices and evasion of individual income tax obligations by foreign
employees. The first stage of the investigation, which was completed
in mid-July, required representative offices to conduct internal
audits of their own taxation and payments, with a view of reporting
any mistakes found throughout the 2000 and 2001 fiscal years. With
over 3,200 representative offices targeted in the audits, the reports
have found that over 1,000 offices made mistakes in filing, resulting
in $7.6 million in late payments. Given that many representative
offices were found to also have inadequate resources to comply with
China's often confusing taxation and accounting systems, the government
and tax bureau has decided to accept these late payments without
imposing any additional fines.
The second phase, however, is not expected to be so
lenient. This will involve the Beijing tax bureau reporting on its
own audit findings of taxation reporting by companies and representative
offices. Whilst firms have had the opportunity to report mistakes
over recent months without any penalties, fines are now expected
to be imposed for mistakes of up to 250 per cent of the understated
taxation obligations. As a result, the tax authorities have warned
companies, especially foreign offices, to get their books in order
and self-report any errors before they are audited by the tax bureau.
With the shifting of the tax collection base away
from import duties (in line with WTO requirements for a reduction
in such duties), the government is under pressure to crack down
heavily on individual income taxes so as to fund public spending.
This has seen a blitz on private PRC businessman and high-profile
citizens who fail to pay individual income taxes, or under report
their tax obligations (by not including overseas salaries for example).
Whilst previously such crackdowns have been very random and not
well executed, it would appear that the new round of tax audits
are being conducted more thoroughly and systematically.
A quick reminder:
In view of this government direction, foreign firms
are urged to review all their financial accounts and tax payments.
It is suggested that all employees, no matter whether they are ultimately
required to pay tax in China or not, should be registered with local
tax authorities as soon as they begin work in the mainland.
Taxpayers in China fall under two categories:
- Individuals who are domiciled in China.
Such individuals are taxed on worldwide income unless they seek
approval from the relevant tax department, whereby they may pay
Individual Income Tax only on the income derived in China, provided
that they reside in China for a period no longer than five years
continuously (after which time tax is calculated on world-wide
income).
- Individuals who are neither domiciled nor resident
in China or who do not have domicile and are resident for less
than one year in China.
Such individuals are subject to tests regarding the length of
their continuous or cumulative residence in China. These tests
are based on taxpayer's country of residence.
There are a number of exemptions for individual income tax purposes,
especially relevant to foreign employees. These may include housing
allowances, return trips home, education allowances etc, but are
subject to certain terms and conditions. Such exemptions should
be confirmed with tax officials.
What if you are not in compliance?:
There is a general consensus that the tax authority will be more
lenient on companies who self-report errors in taxation obligations.
Whilst the Beijing tax authority has instigated a grace period for
companies to review their taxation payments, generally speaking
(and throughout other jurisdictions in China), penalties for under
payment of tax can be up to 5 times the amount underpaid, plus the
actual tax due.
It must be remembered that, generally speaking, in China it is
the employer's responsibility to calculate taxation obligations
for employees and it is the employer's obligation to withhold any
tax payable on behalf of the employee. Thus, penalties for underpayment
of tax are borne by the employer and the tax authorities will hold
the employer responsible and seek retribution through this entity
(not the individual). For companies who have been operating in China
for a number of years with a number of expatriate staff and have
not properly reported tax obligations, such penalties could be quite
substantial.
Once a company acknowledges a mistake in tax payments, it is recommended
that they contact either professional advice and then present their
case immediately to the tax department. From this initial contact
their are basically two methods to calculate taxes payable
and possible penalties:
- The tax authority reviews the case and comes up with a number
of questions (such as time spent in China etc.) which the taxpayer
must answer. Based on these answers the tax bureau will estimate
the tax payable and any fines applicable.
- The tax payer presents and explains their case to the tax
authority, along with a compromise solution to the outstanding
taxes payable.
It is recommended that tax payers adopt the second method in order
to solve their outstanding tax obligations. In our experience, this
has proven to be a great deal less costly than simply letting the
tax bureau do all the background work and is certainly less confrontational.
Of course, this method requires the tax payer to understand the
tax system in China and present a logical compromised solution.
It is recommended that professional advice is sought to help with
this negotiation process.
Final say:
Individual Income Tax in China, especially where foreigners are
concerned, can be a burdensome and often confusing task. It is suggested
that, given the current taxation environment (which is likely to
continue in the future), all companies operating in China completely
understand their taxation obligations and possibly seek professional
advice or assistance to ensure they are compliant. Accounting firms
are able to assist companies to get their books in order, negotiate
with the tax authorities and prepare and file individual tax reports
on a monthly basis.
Underreporting, whether a genuine mistake or evasion, is a very
serious offence and the monetary and non-monetary penalties can
be quite severe. If you are unsure as to whether you or your company
is complying with Chinese taxation regulations, it is recommended
that you seek professional advice or contact the local tax authority.
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