Since China passed the IIT Law in 1980, it has undergone a series of reviews. The IIT system has continued to evolve further with the central government adopting different tax rates and tax exempted fringe benefits on employment income. However, until recently, inadequate information gathering made it hard for tax offices to monitor the real income of individuals.
Under the latest round of reforms, technology is one tool being used to broaden the effectiveness of the system. The mainland tax authorities also require individuals to take additional responsibility for filing tax information. For example, taxpayers with an annual income of more than 120,000 yuan are required to complete an annual tax return as well as their routine monthly tax filing, whether via their employer or individually. This annual return should be finished before the end of March each year (the Chinese tax year is the same as the calendar year).
Mainland tax experts say the move is designed to provide an additional check that high earning individuals, both domestic and foreign, have paid their taxes, some of which may be on an income that is not obtained from one employer. It also brings the mainland system, at least for such taxpayers, in line with those in the United States and Britain.
Mona Mak, a partner and Hong Kong and mainland cross-border personal tax specialist with Deloitte Touche Tohmatsu, said IIT calculations became more intricate according to the complexity of the salary package.
'It makes sense to seek professional advice when structuring expatriate salary packages to ensure liabilities can be planned and catered for in the most tax-efficient and legitimate manner,' Ms Mak said.
She said in line with many other jurisdictions, the mainland government observed international practice by setting in place arrangements that avoided double taxation on overseas people working in the country.
She said employers were obliged to withhold employee IIT when paying salaries to them. Failing to do so could result in penalties. Meanwhile, employers could enjoy 2 per cent of the IIT withheld from the tax bureau as commission.
Ms Mak said the penalties for late payments, non-payment and other transgressions could be severe.