As of January 1, 2019, ex-pats working in China who remain in-country for more than 183 days must report their global income to the People’s Republic of China (PRC). Given the PRC’s participation in the Common Reporting Standard (CRS), ex-pats may be unable to avoid a significant tax burden.
New Individual Income Tax Law
The PRC passed a new individual tax law in 2018 (IIT). The changes resulting from IIT were phased in during 2018 with the final implementation taking effect as of January 1, 2019.
The PRC will count all overseas earnings as taxable income.
The previous ex-pat tax residency rules were more flexible. Ex-pats were not counted as PRC tax residents if they left the PRC for 31 or more days in one trip or for a total of 91 days in one year. The new law considers an ex-pat to be a PRC tax resident if she spends 183 days in the PRC during one year.
Possible Escape Hatch
Given the significant change in tax residency rules, the PRC has created a phase in period directed at ex-pats. IIT provides a limited five-year tax exemption for ex-pats living in the PRC. During this time frame, an ex-pat’s global income will not be taxed. An ex-pat’s global income will take a hit in the sixth year of her being considered a PRC tax resident.
The exemption does not provide for a complete escape. The ex-pat will still continue to be taxed on income she earns within the PRC as well as income she earns outside of the PRC from a PRC-based employer.
This PRC-related income (and ultimately global income) will potentially be taxed at a higher rate. The law created graduated personal income tax rates ranging from 3% for less than 36,000 Yuan in income (approximately $5340.00) to 45% for greater than 960,000 Yuan (approximately $142,325.00).
The new tax law also includes anti-avoidance language that makes it easier for the PRC to investigate those it suspects are engaging in tax avoidance schemes.
FATCA, CRS & Tax Avoidance
Once the ex-pat is required to declare herself a PRC tax resident on CRS self-certifications, it is likely that the tax authority in the jurisdiction in which she has financial accounts will share her financial account information with the PRC tax authority.
Currently, the PRC has CRS sharing relationships with 91 jurisdictions. These jurisdictions include:
The U.S. will not be sharing information with the PRC. Presently, the PRC has not signed a FATCA Intergovernmental Agreement (IGA) with the U.S. The U.S. considers the PRC to have a Model 1 IGA “in substance.” The “in substance” label benefits financial institutions in the PRC because it means that the U.S. is not treating the PRC as a non-IGA jurisdiction.
Once the PRC signs a Model 1 IGA, then the U.S. will assess if and when it will provide the PRC with information on PRC tax residents with U.S. financial accounts.
The U.S. does not participate in CRS. Thus, the U.S. will not be sharing information with the PRC pursuant to CRS.
Human Resources Game Plan
Human Resources (HR) must assess ex-pat compensation packages. Frequently, an employee being transferred to an overseas location is provided local tax reimbursement. The employer will “equalize” the employee’s salary so she is not worse off living in the overseas jurisdiction.
Steps for HR:
Prioritize the company’s ex-pats currently residing in the PRC.
Arrange for a PRC-based international tax attorney to meet with the ex-pats to give an overview of the new law.
Schedule individual calls between each ex-pat and a corporate headquarter’s senior compensation expert to discuss the employee’s specific global income situation.
Review company policy to determine whether the company will continue to equalize PRC salaries given the increased tax rates.
Decide whether to expand company policy to expand the calculation to include other global income.
Relocate ex-pats if the company chooses not to equalize the employee’s global income.
Establish long-term plans to increase training for PRC nationals to reduce the number of ex-pats assigned to the PRC.