Start for 2007 – Various Tax Changes Taken Effect
China tax reform is processing in a steady and cautious manner. A host of taxes, including corporate income tax, value-added tax (VAT), the resources tax and land use taxes will be covered by the reforms. From the beginning of year 2007, several taxes step into new stage.
Stricter Individual Income Tax (IIT) Reporting Obligations
The Chinese tax authority has issued a series of new regulations strengthening on the IIT collections. Some new measures concerning IIT reporting requirements are introduced. Highlighted below are the two major movements:
All People all Income Principle
Starting from January 1, 2006, employers, which served as the IIT withholding agency, are required to report and withhold for all types of incomes paid out to all relevant individuals; irrespective how much the payment amount is and whether the individuals are employees or not.
Along with the income filing, personal data of the individual income earners are also requested. In particular, where the individuals are non-Chinese nationals (including people from Hong Kong, Macau and Taiwan), more detailed information shall be provided. For instance, the foreigner’s working permit number, passport number, the position held inside and outside China, the contact information of that individual’s employer inside and outside China, estimated duration of stay in China, place of the payment for the payroll.
Dual Reporting by Self-Filing and Withholding
Starting from 2006, in addition to the IIT reporting from withholding agent, the following types of taxpayers are also obliged to furnish tax authorities with details of their income by the end of March of the following year.
- Chinese nationals having income derived from more than one source;
- Chinese nationals having income derived from overseas source; and
- Chinese nationals having income derived in China without any withholding agent.
- Taxpayers (including both Chinese nationals and foreign expatriates) derived income more than RMB120, 000 per annum
These new measures are aimed at full disclosures and embracing the concept of managing the total income of all taxpayers. With the comprehensive and detailed information system, the tax authorities will be more effective at curbing tax dodging and ensuring the collection of the tax amount due. The ultimate target is to shift the management focus from high-income earners to all individual income tax payers. This reflects the increasing attention and determination of the Chinese government to enhance the administration of individual income tax.
Higher Vehicle and Vessel Tax
The previous Vehicle and Vessel Usage License Tax for foreigners has been replaced by Vehicle and Vessel Tax, which applied to both native and foreigners. According to the regulation, within the territory of the People’s Republic of China, the owners or managers of vehicles, shops and boats shall be the taxpayers of vehicle and vessel tax. The upper limit for vehicle tax is doubled, bringing the annual tax on passenger-carrying vehicles to between 60 and 660 yuan, and freight vehicles to between 16 and 120 yuan per ton.
At the moment, local tax bureau of each area is busy setting the new levy standard for vehicle and vessel tax. It is said that, many big cities intend to increase the previous standards. Take example for Beijing, the levy standard of passenger-carrying vehicles is capable to be raised above 360 yuan, while the previous standard is 200 yuan for native and 120 yuan for foreigners.
The tax collection on vessels will continue based on each vessel’s capacity. By raising both the lower and upper limits, it will come to between three and six yuan per ton.
Urban Land Use Tax – Also Applied to Foreigners
The newly revised Tentative Regulations of Urban Land Use Tax have been issued. The new regulation has changed in the provisions of taxpayer and tax amount.
– A new section is added to the regulation, “The units as stated in the aforementioned section shall include state-owned enterprises, collective enterprises, private enterprises, joint-stock enterprises, foreign-invested enterprises, foreign enterprisesand the other enterprises… …” This section includes foreign individuals and enterprises, which were only subject to low Site Use Fees and Land Transfer Fees, into levy target.
– The amounts of land use tax per square meter have been raised to the following standards:
- RMB1.5 to RMB 30 in large cities;
- RMB 1.2 to RMB 24 for medium sized cities;
- RMB 0.9 to RMB 18 for small cities;
- RMB 0.6 to RMB 12 for cities under the county level, towns, and industrial and mining zones. “
The new regulation will control the forestalling and promote the proper usage of urban land. But it will have negative effects on foreign enterprises to some extent, at least in the current period. “Most foreign invested enterprises like to arrange whole year’s financial budget at the beginning of the year. The new land use tax will bring additional expenditure to the enterprises and increase the difficulties to capital turnover”, said the financial manager of a foreign invested enterprise.
The most important aspect of China tax reform – Corporate Income Tax – is still in process. The Corporate Income Tax Law was passed by the Standing Committee of the National People’s Congress (NPC), the national legislature, in December 2006, and will be endorsed at the NPC’s annual plenum in March. The new law is expected to be issued in 2008.
Labor Contract Law
A source of considerable controversy, China’s first proposed Labor Contract Law in more than ten years, while not expected to pass into law this month during the annual National People’s Congress, is, according to experts, assured of passage before the end of the year. The proposed law aims to expand worker protections by giving increased leverage to unions as well as attempting to outline some basic reciprocal employer-employee responsibilities. Among them, the law attempts to delineate the terms of probationary periods of employment, employment termination and severance compensation more favorably with respect worker interests. The proposal has been greeted by labor rights activists around the world as a much needed piece of legislation and a reassuring sign of Beijing’s sincerity in confronting pressing labor issues and growing polarization between privileged, urban-dwelling Chinese their less fortunate peers in rural areas.
Late last year the proposed law attracted a bevy of media attention after revelations and accusations of a fierce advocacy campaign against the legislation by western business interests. While advocacy from all sides has certainly occurred and has in fact been solicited by the PRC government, most everyone agrees that the initiative’s intention is admirable, namely to improve labor conditions and create a more harmonious dynamic between employers and employees.
Where is the Problem?
China is often beset by a lack of a formalized enforcement infrastructure, and it is the contention of various business groups that many of the countries most persistent problems are the result not of faulty public policy but rather an enforcement vacuum. Nevertheless, increased authority lent to trade unions to act as employee representatives, secure worker rights and function, more generally, as a workplace watchdog is a prominent feature of the legislation. Unions will be empowered to negotiate and consent to employer policies, regulations and mass labor terminations. Individual employees also stand to receive severance compensation should their “fix-term” contract expire without renewal.
These, and additional requirements of a similar ilk are, perhaps reasonably, viewed by western businesses as overly burdensome, ineffective and ultimately a counterproductive policy solution. Dr. Keyong Wu, an expert with the British Chamber of Commerce, says, “Business is attracted to China not only because of its labor costs but also because of its efficiency. If regulation starts to affect that and flexibility, than companies could turn to India, Pakistan and South-East Asia.” And it is in this sense that worker interests are very intimately linked with their corporate employers.
The scope of the proposed law extends to employee responsibilities as well. In an effort to improve the Chinese intellectual property (IP) environment, it provides employers avenues by which to use and enforce “non-compete clauses” in their labor contracts. Such laws charge current and former employees privileged with knowledge of trade secrets or IP with a set of fiduciary responsibilities aimed to protect confidential material of the company from which it came. These are encouraging efforts that should serve to promote an innovative and competitive Chinese business environment for both foreign and domestic enterprises.
The loud international debate that has accompanied the labor law’s proposal gives us pause to reflect on some macroeconomic forces perhaps at play. Labor rights activists around the world have lamented the global marketplace’s tendency to cultivate “a race to the bottom” which rewards those economies with the fewest labor protections, lowest costs and least cumbersome regulations, which may “bring global wages and conditions down to the level of the least protected.” So why has there been such sustained downward pressure on wages and costs? The selling of services certainly need not dictate it be so.
Harvard economist Richard Freeman interestingly posits that over the past twenty-five years or so, with the liberalizing of the Indian, Chinese and former Communist bloc economies, the global workforce has effectively doubled—China alone accounts for 50% of the increase. This workforce expansion, however, was not accompanied by a commensurate increase in capitol—these were then relatively undeveloped nations without tremendous inherent value—which had the effect of dramatically altering the global capitol/labor ratio. Workers around the world have then found themselves competing for essentially the same amount of capitol as before the market was labor saturated and thus capitol has emerged as an exceedingly valuable commodity.
Thus, given what may be a comparative disadvantage, labor legislation of the kind proposed is imperative to ensure that the most basic worker rights are guaranteed and that the Chinese economy and its constituent workforce enjoy a legal and stable work environment. Foreign enterprises operating in China generally do use more advanced labor relations standards than locally owned businesses and, while the ultimate version of the law is sure to impact them both, it will likely demand more thorough operational modifications from domestically owned entities. As with so many meaningful policy reforms, however, practice and implementation will present the most significant hurdles and largely dictate both the scope of influence and success.