China Individual Income Tax Guide (5) – Computation of tax payable being levied on income from wage and salary

1. General Computation Methods of Tax Amount Payable

In accordance with Article 6 of the Tax Law and Article 26, 27 and 28 of Regulations for the Implementation of the Individual Income Tax Law of the People¡¦s Republic of China, for income from wages and salaries, the balance of monthly income after deduction of RMB 800 in expenses is the taxable income. For those taxpayers who are not domiciled within Chinese, but receive wages and salaries from within China, and those taxpayers who are domiciled within China, but receive wages and salaries from outside of the Chinese borders, additional deductible expenses shall be RMB 3200. The term “the scope of applicability of such additional deductions for expenses” shall mean:

(1) foreign nationals working in foreign investment enterprises and foreign enterprises in China, including overseas Chinese, compatriots of Hong Kong, Macao and Taiwan;
(2) foreign experts hired to work in enterprises, establishments, social organizations and government agencies in China;
(3) individuals who are domiciled in China and derive income from wages and salaries by virtue of their tenure of an office or employment outside China; and
(4) other personal as determined by the Ministry of Finance.

2. The Computation of Payable Tax on the Income from Wage and Salary Gained in Less than One Month

(1) In accordance with the stipulations of Guo Shui Fa [1994] No.148 issued by the State Administration of Taxation, Individuals fit in with the situation as mentioned in Articles 2, 3, 4 and 5 of this Circular who declare payment for the wage and salary incomes gained during the period of less than one month shall have the actual payable tax amount calculated for the wage and salary income in line with a full month, the formula for computation is as follows:

Payable tax amount = (The amount of payable tax on current wage & salary income X Applicable tax rate- Rapid calculating deducting number) X Actual days in China in the month ¡Ò Days in the month

If what an individual of the above-mentioned case receives is daily wage and salary, the daily wage and salary should be multiplied by the number of days in the current month and, after being converted into monthly wage and salary, the above-mentioned formula should be followed in calculating the payable tax amount.

(2) According to the document Guo Shui Fa [1995] No.125 issued by the State Administration of Taxation, for individuals who work for less than one month within the borders of China and are paid respectively by employers outside and inside the borders of China, the question concerning computation of taxable income from salary and wage is clarified as follows: for individuals who reside for no less than one year but not more than five years and individuals who hold the post of higher level managers inside the borders of China and paid by employers inside the borders of China with working days present abroad in one month, individual income tax shall not be levied on the portion of income arising from working days outside the borders of China and paid by employers outside the borders of China.

3. Stipulations on Taxation on Bonus Derived by Foreign Individuals

(1) In accordance with the document Guo Shui Fa [1996] No.183 issued by the State Administration of Taxation, for the lump sum bonus, year-end bonus or profit-sharing according to work due for several months (hereinafter referred to as bonus, excluding bonus paid by the month) derived by individuals who are not domiciled inside the borders of China, the lump sum bonus may be regarded as a single month income on which the individual income tax is computed and levied. Deduction has been made from monthly income from salary and wage on which individual income tax is computed and levied, and so no deduction is made from the above full amount of bonus on which the individual income tax is computed and levied with reference to applicable tax rate without consideration of time apportionment for residence days.

(2) In accordance with the document Guo Shui Han [1997] No.546 and Guo Shui Wai Han [1997] No. 061 issued by the State Administration of Taxation, non-domiciled individuals who have come to China or left China receive lump sum income due for several months, and the determination of the sources of wage and salary income and tax liability shall follow the principle of the place where labor services occur according to relevant regulations. For lump sum income due for several months derived by foreign individuals, if relevant incentive system provided by employment units can prove that the above bonus include the portion arising outside the borders of China prior to arriving in China, the income arising outside the borders of China shall be taxed according to the Tax Law after relevant documents of proof are submitted to competent tax authorities for approval. The income arising inside the borders of China derived by individuals who have stopped fulfilling the contract or left China shall be declared for competent tax authorities of China when the income is obtained.

For the lump sum bonus derived by individuals who are not domiciled in China, the portion of the lump sum bonus derived by individuals who are not domiciled in China on the month on which individuals come to China, if individuals work for several days (whether days are more or less) in China, the bonus derived on the very month may be chargeable to the lump sum bonus on which the individual income tax shall be computed and levied in China, but if individuals stop working in China, and effective working days out of the month on which individuals leave China and effective working days out of the month on which individuals come to China are less than 30 days, the portion of the lump sum bonus arising on the month on which individuals leave China may not declared.

(3) In accordance with the document Guo Shui Han [1999] No.245 issued by the State Administration of Taxation, if individuals who are not domiciled in China and hold the post of enterprises outside the borders of China concurrently hold the post of establishment with foreign enterprises in China, but they do not come to China to perform the duties actually or frequently in the establishment with foreign enterprises in China, the portion of the lump sum bonus arising on the whole month on which they do not work in China may be not regarded as the bonus arising inside the borders of China on which the individual is computed and levied pursuant to the principle of the place where labor services occur; the portion of the lump sum bonus arising on the months on which they work in China for days shall be taxed in full according to the computation method set by the document Guo Shui Fa[1996]No.183, no more individual income tax shall be levied on the basis of computation of effective working days on the very month in China.

4. Question concerning Employers Paying Tax Payment for Which Employees Shall be Liable

In accordance with the document Guo Shui Fa [1996] No.199 issued by the State Administration of Taxation:

(1) Question concerning employers paying tax payment in full for which employees shall be liable If employers pay tax payment in full for which employees shall be liable, income not containing tax shall be converted into taxable income on which individual income tax is computed and levied according to the formula set by Article 14 of Guo Shui Fa [1994] No.089.

(2) Question concerning employers paying tax payment in part for which employees shall be liable

(a) If employers pay tax payment in part for which employees shall be liable, income not containing tax shall be converted into taxable income on which individual income tax is computed and levied according to the formula set by Article 14 of Guo Shui Fa [1994] No.089. The formula by which the income is converted into taxable income is as follows:

Taxable income =Income derived by employees + Tax payment borne by employers instead of employees – Deduction standard

(b) If employers pay proportional taxable income or proportional actual taxable income for which employees shall be liable, ¡§income not containing tax¡¨ in the formula of computation of taxable income not containing tax set by Article 14 of Guo Shui Fa [1994] No.089 shall be replaced with ¡§the income not containing tax payment borne by employers¡¨, meanwhile, rapid calculating deducting number and tax rate shall be multiplied by the above ¡§percentage of tax payment borne by employers¡¨, and then income not containing tax payment borne by employers is converted into taxable income on which individual income tax is computed and levied according to the adjusted formula, namely,

Taxable income = (Income not containing tax payment borne by employers – Deduction standard ¡Vrapid calculating deducting number x percentage of tax payment borne by employers) ¡Ò (1 – tax rate x percentage of tax payment borne by employers)

Taxable income = Taxable income x applicable tax rate ¡Vrapid calculating deducting number

(3) Question concerning employers paying the balance resulting from tax payment in excess of taxation from original residence country for employees

Establishments or sites established in China by foreign funded enterprises or foreign enterprises pay the balance resulting from tax payment in excess of taxation from original residence country for expatriate employees working inside the borders of China. For instance, the portion of taxable income of employees within the borders of China equivalent to the taxable income (hereinafter referred to as taxation from original residence country) computed with reference to the Tax Law of original residence country shall be borne by employees and withheld from the income paid by employers; if the taxation according to the Tax Law of China is in excess of the taxation from original residence country, the balance of taxation shall be borne by employers. Where the above situations occur, the following principle shall be applicable:

Income not containing tax of employees(the income from which taxation from original residence country is deducted) shall be converted into the taxable income on which the individual income tax is calculate and levied according to the formula set by Article 14 of Guo Shui Fa [1994] No.089; if computed taxable income is less than the taxable income from actual salary and wage (the income from which taxation from original residence country is not deducted), individual income tax shall be computed and levied on the actual income derived by employees.

Formula:
1. Income not containing tax =Income derived by employees ¡V Taxation from original residence country
2. Taxable income = (Income not containing tax ¡V Deduction standard ¡V Rapid calculating deducting number) ¡Ò (1-tax rate)
3. Tax payable = Taxable income x applicable tax rate – Rapid deduction computation

5. Stipulations on Taxation on Foreign Currency being converted into RMB

(1) In accordance with Article 10 of the Tax Law and Article 41 of Regulations for the Implementation of the Individual Income Tax Law of the People¡¦s Republic of China, the calculation of all types of income shall be in the local currency, renminbi. If any income is denominated in a foreign currency, it shall be converted to renminbi according to the foreign exchange rate set by the state foreign exchange administration authorities for purposes of tax payment. Foreign currency income shall be converted into Renminbi for the computation of the amount of taxable income at the exchange rate published by the People¡¦s Bank of China on the last day of the month preceding that in which the tax payment receipt is issued. At the time of the annual settlement after the end of the year in accordance with the Tax Law, the amounts of foreign currency income on which tax has been prepaid on a monthly basis or each time the income was derived shall not be converted again. As for the portion of income the tax on which is to be made up, the amount of taxable income shall be computed by converting such portion of income into Renminbi according to the exchange rate published by the People¡¦s Bank of China on the last day of the preceding Tax Year.

(2) In accordance with the stipulations of Guo Shui Fa [1995] No.070 and Guo Shui Fa [1995] No.173 issued by the State Administration of Taxation, People¡¦s Bank of China shall promulgate the Base Exchange rate of the RMB versus the dollar, yen and Hongkong dollar and no longer promulgate the Base Exchange rate of the RMB versus other currencies as of April 1st of 1995. To facilitate the declaration by taxpayers and taxation and verification by tax authorities, questions on foreign exchange quotation referenced by enterprises and individuals for taxation are specified as follows:

(a) For income earned by enterprises and individuals is denominated in dollar, yen or Hongkong dollar, individual income tax shall be paid in currencies being converted into RMB based on the aforesaid Base Exchange rate.

(b) For income earned by enterprises and individuals is denominated in currencies other than dollar, yen or Hongkong dollar, the income shall be crossed on the basis of the base exchange rate of the dollar versus the RMB and exchange rate of the dollar versus main currencies provided by the State Administration of Exchange Control in New York foreign exchange market, the individual income tax shall be calculated and paid according to crossed exchange rate as conversion rate. Formula of cross conversion is as follows:

Exchange rate of a certain currency to RMB = Base exchange rate on the dollar versus the RMB ¡Ò Exchange rate on the dollar versus a certain currency in New York foreign exchange market.

(c) Enterprises and individuals shall submit tax their returns with attached computational procedure of exchange rate conversion.