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SCMP Reporter

DOING business in China can result in big personal tax bills for the unsuspecting, say accountants Price Waterhouse.

   In January, China's State Tax Bureau, the equivalent of Hong Kong's Inland Revenue, introduced a harsh income tax code which imposes a rate of 45 per cent for those earning more than about US$10,000 a month.

   Pieter de Ridder, a senior manager with Price Waterhouse, said: ''In the old days, the Chinese authorities generally ignored foreigners' tax liability, but they are now taking steps to ensure that the rules are enforced.''    Those liable also have to file a return - and pay their tax within the first seven days of each month.

   If their income is split between Hong Kong and China, they could also face the administrative hassles of having to seek exemption from Hong Kong's Inland Revenue for the part of their income that has already been taxed.

   Employment tax is imposed on any earnings from an employer in China - this can be a representative office of a Western company.

   Those domiciled in Hong Kong with an employer in China will be liable if they work in China for 90 days or more a year.

   Susie Tse, a senior manager with Price Waterhouse, said: ''Someone whose employer resides in China or is permanently established there, such as through a joint venture or representative office, will be liable for local tax. This is because their pay is considered to be earned within China.''    For those holding a passport for any of the 37 countries with whom China has a tax agreement - including the United States, Britain, Japan, Australia and most western European countries - the tax-free period is 183 days.

   Those found to be evading income tax face punitive interest charges of 0.2 per cent a day on the unpaid tax and a fine of 5,000 yuan (about HK$4,475).

   And staying away from the country for several years as a way of evading tax will not work because China does not have a statute of limitations.

   Mr de Ridder said: ''Individuals and companies moving into the country would also put themselves at a serious disadvantage by falling out with the authorities because of unpaid tax.''    Employees moving between Hong Kong and China can easily avoid having to pay tax on their earnings twice.

   Ms Tse said: ''Hong Kong is not a party to any comprehensive double tax treaties with any other countries or territories and, therefore, any double tax relief is unilaterally given.

   ''The Inland Revenue provides for salaries tax relief where an employee has rendered services overseas, such as China, and has paid tax of substantially the same nature as salaries tax in that country. An individual can claim exclusion from salaries tax for the portion of his income being taxed in that country overseas.''    An option for those working in China and Hong Kong is to arrange a split employment contract.

   Ms Tse said: ''Under such an arrangement, the China and offshore responsibilities will be covered by separate contracts. In this case, only the portion of remuneration, which relates to duties and work performed inside China, will be reported and taxable in China.

   ''However, the apportionment of the remuneration between the expatriate's China and non-China responsibilities must be reasonable and fair.''    For example, someone spending half his time in China might find questions raised by tax authorities if he claimed it produced only 10 per cent of his income.

   This would particularly suit those involved in joint ventures, or where the company had a representative office in China.

   Alternatively, those that were constantly travelling to China and other regional capitals could avoid most of their liability by apportioning their time between different countries.

   Hong Kong's Inland Revenue allows employees to segment their working days so that they only pay tax on those days spent in the territory.

   Take, for example, a businessman with an annual income of about $1 million, who spends 200 days a year in Hong Kong and 165 in other countries.

   He can arrange his affairs so that he pays tax only for the period spent in the territory, thus saving himself $65,000 a year.

   Generally, managers rather than directors of Hong Kong companies will be eligible for this relief, because directors are assumed by the Inland Revenue to do most of their work in Hong Kong.

   To be eligible, employees must satisfy four conditions:     They must be employed by a foreign company whose head office is outside the territory. While this rule is specifically designed for expatriates, it also applies to locals.

    Employees must ensure that they work for the head offices and are not employed by a Hong Kong subsidiary.

    The contract must be negotiated and enforceable outside the territory and not subject to Hong Kong law.

    Salary must be paid from outside Hong Kong.



Tax traps await unwary investors on mainland