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FINANCE: Your Annual China Individual Income Tax Return
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Your Annual China Individual Income Tax Return

By Edmund Yang, Tax Partner,Hao Dong, Tax Manager,PwC International Assignment Service


BT 201502 13 Finance Tax Season 1tepping into 2015, to some foreigners working in China, filing of the annual China individual income tax return may still be an item not included in their to do list or one which they are not accustomed of paying too much attention to. The filing of this year's Annual China Individual Income Tax Return will be due on the 31st of March 2015. It was initiated in 2006 and this year will be the 9th of its kind.


It is the responsibility of the employee to report the taxable monthly employment income and the corresponding settlement of the monthly individual income tax payable account. This was earlier done by the employer but the responsibility is now passed down to the employee. However this filing need not be done if the exemption conditions are met.


For example, if you are the fortunate (or the less fortunate) with an annual income from all relevant sources adding up to less than 120 000 CNY. Alternatively, if you have spent at least 31 consecutive days or 91 days in total overseas during the calendar year concerned, you can also be exempted from filing the annual China individual income tax return. The key point to remember when counting "the days spent outside of China" is your arrival and departure dates (to and from China) should be counted as days spent in the country. Let's say you left China on 1 March, to make this trip one which qualifies you of having spent at least 31 consecutive days outside of China, 2 April would then be the earliest returning date to China.


You may have noted the phrase "annual income from all relevant sources" was cited in the last paragraph. Reason for this is because a foreigner subject to China individual income tax on their worldwide income could be a significant factor. More so than the filing of annual China individual income tax return, foreigners being subject to China individual income tax on their worldwide income is another unknown fact to many or one which some foreigners have chosen to ignore.


BT 201502 12 Finance form 1040 us individual income tax returnWhen you overhear people talking about planning their overseas trip(s) to restart the 5-year count for China tax purpose, they were planning to avoid being liable to China individual income tax on their worldwide income. Technically speaking, a foreign individual would be subject to worldwide income taxation under China tax rules starting from his/her sixth consecutive full year of residence in China. Another key point to remember is that if you have spent at least 31 consecutive days or 91 days in total outside of China during a calendar year, you would not be considered having resided a full year in China for that particular year. So another example for clarification: 1 March 2010 was the first date you moved to China for starting your long term China assignment, your absolute last chance for restarting the 5-year count is to depart China on 30 November 2015 (and not returning to China until 1 January 2016).


Under the simple scenario of you not being subject to China individual income tax on your worldwide income, you only need to report your income source if you are required to file an annual China individual income tax return. To many foreigners, China source income would simply be their own employment income and interest income from a local bank. However, to those foreigners liable to China individual income tax on their worldwide income, they should actually report their income from all sources, including income generated from sources outside China (e.g. rental income from home country property and interest income from bank accounts maintained outside China), in their annual China individual income tax return.


BT 201502 15 Management hlYou may say filing of an annual China individual income tax return is not what you should be too concerned with, especially when you have good faith in the employer provided tax filing data. Well, the catch is exactly the completeness and accuracy of the tax filing data received from your employer. Although your employer is primarily responsible for reporting your monthly taxable employment income accurately and fully settled your monthly individual income tax payable with the in-charge tax bureau, you are not completely off the hook for any underpayment of income tax on your taxable employment income. According to the China tax rules, individuals could be levied late payment interest at 0.05% per day and underpayment penalty up to 5 times the tax underpaid. Hence, it would be in your best interest to have a fair understanding on what taxable income and benefits have been included in the monthly taxable employment income reported by your company.


If you were someone involved in compiling the tax filing data for your company's employees in preparing their own annual income tax return, a review of the compliance level with the China tax rules would be beneficial to the company and your colleagues. The universal general rule of thumb to fix the problem voluntarily before being caught by the tax authority could well be the less costly option.


As for your general reference, table below includes examples of some commonly under-reported taxable items.


So you are ready to fulfil your annual China individual income tax return filing requirement, then what are the available filing options and how to handle any tax due or to claim a refund of the tax overpaid. Unfortunately, these could be a cause for frustration,somewhat depending on the in-charge tax bureau's practice. Hence, it would be advisable to check well in advance.


Generally speaking, you can choose to file your annual China individual income tax return online at the in-charge local tax bureau's web site or file it in person or by mailing it if there is no tax due. If confirmation of online completion of your annual individual income tax filing is available, online filing of your annual individual income tax return would be the preferred convenient option. If not and because you have tax payable to settle or need to apply for a refund of tax overpayment, a personal visit to the in-charge tax bureau would then be necessary. Since the available means for settling tax due and the supporting documents required for lodging a tax refund applicable vary among the tax bureaus, so check in advance to avoid the frustration.


BT 201502 16 Management 3If you were liable to China individual income tax on your worldwide income, checking your in-charge tax bureau's practice would be even more important. Under China tax rules, foreign tax paid on your income from sources outside China may be claimed as credit against your China tax payable (so being subject to China individual income tax on your worldwide income may not necessarily increase your overall tax burden). Because the credit cannot be claimed until after you have settled your foreign tax payable and quite often this may not happen before the 31 March due date for filing your annual China individual income tax return, you need to check the filing procedures with your in-charge tax bureau for proper filing of your annual China individual income tax return. The key point for bearing in mind is checking the required filing procedures applicable to your case well in advance may avert you the heart wretched experience.


Closing paragraph for convincing you on why it is worthwhile to pay more attention to the filing of your annual China individual income tax return. The tax authority's intention to increase the compliance level among foreign taxpayers is well publicised and their intensified effort in enforcing the China tax rules, including timely and proper filing of annual individual income tax return, is not what you and/or your employer may want to take light heartily. Just in case you do not already know, China has agreement with many countries for exchange of tax data.


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