Individual Income Tax Law of the People's Republic of China (2011 Revision) and the Regulations on Its Implementation

Individual Income Tax Law of the People's Republic of China (2011 Revision)
Issuing Body: Standing Committee of the National People's Congress
Issuing Date: June 10, 2011
Effective Date: September 1, 2011

Regulations on Implementation of the Individual Income Tax Law of the People's Republic of China (2011 Revision)
Issuing Body: State Council
Issuing Date: July 19, 2011
Effective Date: September 1, 2011

Seeking to shift more of China's individual income tax burden to those who earn a relatively high income—including many foreigners—the Standing Committee of the National People's Congress released the Individual Income Tax Law of the People's Republic of China (2011 Revision) (2011 Income Tax Law) on June 19, 2011. The State Council followed up six weeks later by issuing the Regulations on Implementation of the Individual Income Tax Law of the People's Republic of China (2011 Revision) (2011 Implementing Regulations). Both became effective on September 1, 2011.

The Individual Income Tax Law of the People's Republic of China (PRC Income Tax Law) was first enacted in 1980. It has been revised five times since then, most recently in 2007.

Key changes to China's individual income tax system introduced by the 2011 Income Tax Law and the 2011 Implementing Regulations are summarized below.

Higher Standard Deductions

According to the PRC Income Tax Law, taxable income is calculated monthly by subtracting a standard monthly deduction from income. The new income tax rules increase the standard monthly deduction from RMB2,000 to RMB3,500.

As a result of this change alone, approximately 60 million individual income taxpayers will be exempt from individual income tax liability, according to government figures.

The PRC Income Tax Law allows foreigners working in China an extra monthly deduction, in addition to the standard monthly deduction available to Chinese citizens. Previously, the additional monthly deduction was RMB2,800, meaning the total monthly deduction for foreigners working in China was RMB4,800 (RMB2,000 for the standard deduction, plus RMB2,800). The 2011 Implementing Regulations reduce that differential increase to RMB1,300, but the total monthly deduction for foreigners remains at RMB4,800 as a result of the increase in the general deduction to RMB3,500.

New Filing Deadlines

In an attempt to streamline tax deadlines for businesses, which withhold income taxes for employees, the 2011 Income Tax Law and the 2011 Implementing Regulations move the filing and payment deadline for monthly income tax returns from the seventh day of the following month to the fifteenth day of the following month, the same as for Enterprise Income Tax, Business Tax, and Value-Added Tax.

Since 2006, individual income taxpayers with an annual income of RMB120,000 or more have also been required to file an annual tax return, which is due on March 31 of the following year. The 2011 Income Tax Law and the 2011 Implementing Regulations leave that requirement in place, including the RMB120,000 threshold.

Lower Rates, Fewer Brackets

The 2011 Income Tax Law and the 2011 Implementing Regulations somewhat simplify the nation's income tax system, reducing the number of brackets from nine to seven. Under the new rules, marginal tax rates range from 3 percent (for income below RMB1,500 a month) to 45 percent (for income above RMB80,000). The new rules also adjust the amount of income within each bracket, again with the broader effect of reducing the tax burden on lower-income taxpayers:

• For a Chinese taxpayer with a monthly income of RMB5,000 (US$784)—roughly the average in first-tier cities such as Shanghai, Shenzhen, and Guangzhou—income taxes will fall some 86 percent under the new rules.
• Chinese taxpayers earning RMB10,000 a month will enjoy a 39 percent decrease in income taxes.
• For those with a monthly income of RMB38,600, taxes remain unchanged.
• Income taxes are raised 1.5 percent for those earning RMB50,000 a month.
• Income taxes rise 3.8 percent for those who earn RMB100,000 or more a month.

Conclusion

According to statistics released by China's National Statistics Bureau, in June 2010,

the average monthly income in Shanghai was RMB5,350, while in Shenzhen it was RMB5,280 and in Guangzhou it was RMB4,750: In other words, many ordinary Chinese citizens will enjoy a tax cut as a result of the 2011 Income Tax Law and 2011 Implementing Regulations. High-income earners, on the other hand, will see a relatively modest increase in their income taxes.

Since the majority of foreigners working in China are high-income earners, they may be subject to greater individual income tax liabilities in China under the 2011 Income Tax Law. Given the Chinese government's efforts to strengthen income tax administration on high-income earners, it is advisable for employers and individual taxpayers with high earnings to be watchful in their individual income tax compliance and seek professional advice if necessary.