A taxing task for HR experts
WITH SO MANY Hong Kong people accepting jobs on the mainland, local human resources professionals have had to add a new string to their bows. They must now be familiar with the regulations on individual income tax in China, how it is paid and why it cannot be ignored.
'In the past, a major issue was often the reluctance to pay tax, but professionals should alert themselves to the legal consequences of not making honest declarations,' said Calvin Lam, co-chairman of the Tax Sub-committee of the Association of Chartered Certified Accountants (ACCA) Hong Kong.
This reluctance stems from the fact that the scale of rates for individual income tax in the mainland ranges from 5 to 45 per cent. When compared with Hong Kong's flat rate of 15 per cent, that can come as something of a shock for middle and senior-level employees who are contemplating a move.
To compensate, employers previously offered packages which included allowances for housing, travel, cost of living, and a fixed sum to cover the differential in income tax. Nowadays, though, the tendency is to offer an extra 20 to 30 per cent on top of a basic Hong Kong salary.
Employers have also had to accept the primary legal responsibility for administering the pay-as-you-earn system, which involves withholding a proportion of all salaries to cover individual income tax liabilities. They must transfer this sum to the local government before paying individual employees.
Transfers must be made to the authorities on a monthly basis into a designated bank account. This is opened in the name of the company, but the tax bureau is allowed to withdraw funds. Subsequent to the filing of a tax return, the bureau will take the accumulated funds from the account and issue a tax receipt to individuals via the company.
In recent years, many employers in China, particularly multinationals, have appointed professional services firms to handle these procedures for them. The intention is to ensure accuracy and timeliness, and to achieve a degree of confidentiality which otherwise might not be maintained.
'It should be remembered, though, that theoretically there is no time limit on how far back an investigation can go. In practice, it is usually no more than three or four years,' Mr Lam said.
He also explained that most companies operating in the mainland were now more 'risk averse' in their approach to tax filings, with the result that the government was having fewer difficulties in collecting revenues.
'There has been a process of education and mentalities have changed,' Mr Lam said. 'Previously, people thought they would not get fined, but now tax bureaus are doing closer checks on possible under declarations of payroll totals and the non-disclosure of full incomes to the Chinese authorities.' Mr Lam advised companies to undertake a 'housekeeping' exercise at least once every two years to make sure that there were no cases of under-reporting and to be certain the withholding obligations were being complied with.
On a more regular basis, it was important to confirm that the correct tax bands and allowances were being applied for each individual.
Staff relocated from Hong Kong or elsewhere should be left in no doubt about the underlying principles and tax implications regarding length of stay in China in one calendar year.
Mr Lam emphasised that the regulations were clear and should be followed. The reporting of individual income tax was generally one of the first two or three items looked into by any tax investigator when reviewing a company's accounts.
Since the regulations were relatively straightforward, he said any person not complying was 'easy to catch'.
In theory, any irregularity can be penalised by a fine equivalent to a maximum of five times the originally assessed amount, though first-time offenders could usually negotiate a lower penalty.
If HR managers new to positions in China found that something had been wrongly reported in the past, they were advised to volunteer these details and thereby minimise any resulting penalty. 'Voluntary disclosure is much better than if the authorities come upon this type of information in some other way,' Mr Lam said.
In order to assist HR professionals who are either transferring to the mainland or assuming responsibility for offices there, ACCA has organised specially designed seminars for accredited employers. These cover general China taxation matters without going into all the minutiae.
'One example was the seminar on 'Recruiting Talent in Mainland China', advising HR people what they need to know when employing local Chinese staff and expatriates,' said Ada Leung, head of marketing for ACCA Greater China.
'We explain the implications for payroll and employment contracts, while outlining the procedures that need to be in place to ensure things are managed efficiently,' Ms Leung added.
Laying down the law
Tax laws in China are clear and the authorities are enforcing them more thoroughly.
Companies are required to withhold individual income tax on a monthly basis for transfer to an account administered by the local tax bureau.
HR managers should do regular 'housekeeping' of payroll and tax items.
Voluntary disclosure of any past irregularities is a recommended option.
ACCA is running special seminars on China taxation topics for accredited employers.