Most expatriates in China have come to understand the individual income tax (IIT) reform that went into effect in January of 2019. This marked a major change for the Chinese tax system and brought with it a wide range of implications for expatriates including how tax residency status is defined, the new ‘six-year rule’, and the updated comprehensive income tax system to name a few.
Amongst the numerous changes to IIT in China was the introduction of a new annual income tax return filing requirement for resident taxpayers, which requires individuals to file an online tax return between March 1 and June 30 of the following year. The first such annual tax filing since the introduction of the new system is taking place in 2020 and tax residents are encouraged to familiarize themselves with the new filing requirements in preparation for the upcoming deadline.
Who needs to file an annual tax return
A resident taxpayer includes foreign nationals who reside in China for more than 183 days in one calendar year and all Chinese nationals. According to the new IIT law, resident taxpayers must submit an annual tax return if any of the following apply:
- Taxpayer obtained comprehensive income from two or more sources and the total annual income minus itemized deductions is more than RMB 60,000;
- Taxpayer obtained one or more sources of comprehensive income from labor services, author’s remuneration, or royalties, and the total annual income minus itemized deductions is more than RMB 60,000;
- The amount of tax paid in advance within the tax year is above the tax payable amount; or
- The taxpayer applied for a tax refund.
The threshold for requiring individuals to file an annual tax return has been set rather low and will likely impact a large portion of expatriates living and working in China beyond the 183-day mark. While China requires income taxes to be withheld at the source and paid to the relevant authorities on behalf of the employee, it is the responsibility of individuals to ensure that their annual IIT filings are completed correctly and in a timely manner.
When and how should I submit my annual tax settlement
The first annual tax filing for individuals under the new system is taking place from March 1st until June 30th, 2020for the 2019 tax year. Resident taxpayers can complete the annual tax return either 1) on their own 2) enlist their withholding agent – often the employer or payroll provider; or 3) engage a third-party service provider to assist them.
Annual tax returns can be filed under the online tax portal designated by the provincial, autonomous region, or municipal government to which the tax resident is register to, or through the mobile application (个人所得税). Taxpayers can also obtain a mail-in tax return form which can be filled out and mailed to the designated tax service office.
Due to the online tax return filing portal being available only in Chinese, many expatriate tax residents may choose to enlist their withholding agent or an outsourced service provider to assist them with their submission. These individuals should ensure the authenticity, accuracy, and completeness of any and all financial information including supplementary comprehensive income, qualified deductions, and other applicable tax benefits.
Should a resident taxpayer plan to leave China prior to the start of the tax filing submission period, they can request an early submission before leaving the country by visiting the tax bureau directly.
Implications of an annual tax filing system
For many US citizens in China, filing annual tax returns is not a new concept. However, this recent addition to China’s IIT law marks a gradual shift toward an international standard for taxation for China allowing for a simpler return process should taxpayers overpay on their income taxes during the year.
However, given that the introduction of an annual tax return filing for resident taxpayers comes with the potential for regulatory scrutiny from the tax authorities, taxpayers should pay close attention to their tax return and the income and itemized deductions. If declaring multiple sources of income or worldwide income, taxpayers should consult with a tax specialist prior to filing their tax returns as to avoid double taxation or unqualified deductions.