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The Amended China Individual Income Tax Law – Effective September, 2011

The Individual Income Tax (IIT) Law was approved by the National People’s Congress in June and will soon take effect on September 1st 2011.

From what can be seen, the IIT reform will give tax relief to low and medium income earners while subjecting high income earners (which most foreign expatriates living in China qualify as) to a greater tax burden. This reform can be viewed as part of a national strategy to address income disparity and redistribution. In order to ensure a smooth transition, companies will have to work with their HR, finance, tax, IT and other administration departments to update their IIT compliance process.

Relevant points to take away:

  • The original 9 brackets under the progressive tax rate system will be reduced to 7.

  • Although the tax rate for the first bracket of employment is reduced from 5% to 3%, the new 7-bracket tax rate will subject high income earners to higher IIT rates.

  • The highest tax rate of 45% now applies to monthly taxable income exceeding 80,000RMB rather than 100,000RMB.

  • The standard monthly deduction – or the threshold for tax exemption bracket - for employment income is increased from 2,000RMB to 3,500RMB.

  • Foreigners, residents of Hong Kong, Macau, Taiwan, and overseas Chinese working in China are entitled to additional deduction of 2,800RMB. Therefore, existing monthly deduction for expatriate is 4,800RMB (2,000RMB + 2,800RMB). It is likely that is deduction will remain the same.

Comparison Line Graph for Tax Rate – Before and After IIT Reforms:



Comparison Bar Graph for IIT Payable – Before and After IIT Reforms:


 

(Source: Pwc, Deacons)

 

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