The State Council and the State Administration of Taxation (“SAT”) released the implementation rules The State Council and the State Administration of Taxation have released new implementation rules and supplementary guidance notes to supplement the new Individual Income Tax Law. These rules and notes are, effective from 1 January 2019. They provide important guidance on the following：

• interim measures for the administration of itemised deductions
• IIT withholding calculation methods applicable to resident and non-resident taxpayers
• requirements for IIT declarations
• tax treatment of foreign-sourced income derived by foreign individuals
  

The Implementation Rules and supplementary guidance notes will impact the following groups:

IIT withholding mechanism

Announcement 56 sets out the IIT withholding calculation methodologies for resident and non-resident taxpayers. 

Resident taxpayers

Comprehensive income derived by resident taxpayers is subject to tax withholding as follows:

• Salary and wages 
  

Salary and wages earned by resident taxpayers are subject to IIT withholding based on the cumulative withholding method, as follows:

Tax to be withheld in current period = cumulative tax payable – cumulative tax withheld in previous period 

Cumulative tax payable = cumulative taxable income × withholding rate – quick deduction

Cumulative taxable income = cumulative income (excluding tax-exempt income) – cumulative applicable deductions (including personal deduction, special deductions, itemised deductions and other applicable deductions)

• Personal services income, author’s remuneration and royalties
  

IIT should be withheld separately in respect of personal services income, author’s remuneration, or royalties. Personal services income, is subject to withholding at the rates outlined in Appendix 2. Author’s remuneration and royalties are subject to a flat withholding rate of 20%.

• Annual reconciliation for comprehensive income
  

Resident taxpayers who derive comprehensive income that has not had the correct withholding tax applied at source during the tax year should perform an annual reconciliation filing. The annual reconciliation filing, to settle the tax due or claim a tax refund, should be performed between 1 March and 30 June following the tax year.

Non-resident taxpayers

Salary and wages, personal services income, author’s remuneration and royalties derived by non-resident taxpayers are subject to tax withholding according to the following.

• Salary and wages

Salary and wages earned by non-resident taxpayers are subject to monthly PRC IIT withholding at the rates outlined in Appendix 3 after the monthly personal deduction of RMB5,000.

• Personal services income, author’s remuneration and royalties
  

Personal services income, author’s remuneration, or royalties are subject to PRC IIT withholding separately and on an occurrence/monthly basis at the rates outlined in Appendix 3.

Itemised deductions（applicable to resident taxpayers only）

The following are notable differences between the recently issued Interim Measures and the earlier draft which was discussed in Issue 22 of KPMG's China Tax Alerts issued in October 2018 (click here). 

• Further education - academic education:
  
  • The deduction is applicable only for education received at institutions in Mainland China; 
    
  • A maximum period of deduction of 48 months is allowed for each degree.
    
• Serious illness medical fees:
  
  • These expenses should be within the scope of PRC social medical insurance;
    
  • A deduction applies only for self-paid medical fees in excess of RMB15,000 per annum;
    
  • The deduction cap is increased to RMB80,000 per annum;
    
  • The deduction can be claimed either by the patient him/herself or his/her spouse. If the patient is a juvenile, it is deductible by either of his/her parents.
• Mortgage interest:
  
  • This deduction is available for a maximum period of 240 months;
  • If a couple each take out a first mortgage before marriage, they can each claim a deduction of either 50%, or one of them can claim a deduction for 100%.
    
• Housing rental
  
  • For big cities, the deduction is increased to RMB1,500 per month.
  • For other cities with populations over 1 million, the deduction is increased to RMB1,100 per month.
    

Announcement 60 sets out the detailed administrative requirements for itemised deductions including the timing of claims, reporting requirements and supporting documents to be provided by both individual taxpayers and their withholding agents:

• Individual taxpayers should:
  
  • provide the required claim information either directly to tax authority via its website/mobile APP or by completing and submitting the information collection paper/electronic forms via their withholding agents or to the tax authorities directly;
  • confirm any changes to their itemised deductions for the following year to their withholding agents in December each year if continuing to claim deductions via their withholding agents;
  • take responsibility to ensure the information provided for the purpose of the itemised deductions is authentic, accurate and complete; and
  • retain the Itemised Deduction Information Collection Forms and the relevant supporting documents for at least five years after completion of the annual reconciliation filing.
    
• Withholding agents should assist their employees in claiming itemised deductions either
  
  • based on the information shared by the tax authority, where the information is submitted by the employees to the tax authority directly; or
  • by submitting the information collection forms received from the employee to the tax authority via tax filing system electronically and printing out two copies of the forms (one for the employer and another for the employee) endorsed with employee’s signature and company chop. These need to be retained for at least five years following the year of withholding filings.
    

“Six-year Rule”

The Implementation Rules states that individuals who are regarded as non-domiciled in Mainland China and have not been tax resident of China for more than six consecutive years may claim an exemption for their foreign-sourced income paid overseas by performing a put-on-record filing with the tax authorities.

For any year during which a non-domiciled person is away from Mainland China for more than 30 continuous days, the six-year residence period will restart.

The Implementation Rules and the supplementary guidance notes did not provide any details about the General Anti Avoidance Rules (“GAAR”) and removed certain clauses which were introduced by the Draft implementation rules, such as deemed transfer rule, tax collection and administration rules on partnership.

In order to implement the new IIT Law, a series of administration measures have been promulgated. These embody the government’s strategy to streamline tax administration, delegate power and optimize services. Whilst strengthening tax collection and administration, the government is also seeking to reduce individual taxpayers’ tax burdens and their withholding agents’ administration costs. 

However, some areas still remain unclear, such as detailed implementation rules on GAAR. These are expected to be clarified in another batch of circulars to be released. Individual taxpayers and their withholding agents need to pay attention to the following:

Individual taxpayers and their employers

• The cumulative withholding methodology marks a significant change to the IIT withholding mechanism. Adopting a cumulative withholding methodology will result in lower tax withheld in the earlier months and higher tax withheld in the later months of a tax year. Individual taxpayers and their employers should familiarize themselves with the relevant calculation procedures and, reporting and administrative requirements. 
• Announcement 56 provides different IIT withholding methodologies for resident taxpayers and non-resident taxpayers. Withholding agents need to assess and determine the residency status of their employees in order to withhold IIT properly.
• Announcement 60 requires taxpayers to be responsible for the authenticity, accuracy and completeness of the information provided for claiming itemised deductions. However, withholding agents play a key role in the collection and administration of itemized deductions for their employees. If false or erroneous claims are discovered, withholding agents should remind their employees to correct their claims, and should notify the tax authorities if the individual concerned refuses to make the necessary corrections.
  

Withholding agents should review and make necessary adjustments to their existing tax filing systems, internal tax procedures, HR policies and administration procedures in view of these new developments.

With respect to the “Six-year Rule”, the commencement of the six-years period and the details of the put-on-record filing required to claim tax exemption on foreign sourced income derived by non-domiciles raises many issues. Further clarifications are expected.

As we mentioned in previous alerts, a number of anti-avoidance rules were introduced in the new IIT Law. Detailed implementation rules concerning these, including the new general anti-avoidance rule, have not been included in the Implementation Rules and supplementary guidance notes, but are expected to be the subject of separate circulars.

KPMG will continue to pay close attention to the relevant circulars to be promulgated under the new IIT regime, and we will share our observations. Please contact us for the most updated news in relation to IIT reform and other tax regulations.

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