China Individual Income Tax Settlement
WHAT DOES THIS MEAN?
Whether you are a foreigner or local based in China you are required to ensure that you have paid the correct amount of tax on your comprehensive income over the previous year. If you have been in China for 183 days or more, you are classified as a tax resident and would be required to complete the reconciliation process.
WHAT IS THE PURPOSE OF THE ANNUAL IIT FILING?
The purpose of the IIT filing is to perform a reconciliation of the actual tax paid versus the amount of tax payable, in a particular year. The amount is based on the earned comprehensive income minus all the standard and special deductions, which gives you the final taxable amount for the year 2021.
Any difference that exists between the prepaid tax amounts and the actual amount payable will result in either taxes being refunded to a payee, or an additional payment needs to be made. In this article we discuss the taxable income and the deduction, as well as the process to be followed for the annual IIT settlement.
WHAT IS TAXABLE INCOME?
The following 4 income sources are consolidated into comprehensive income:
- Wages and salary
- Remuneration for personal services
- Income from remuneration for manuscripts
- Income from royalties
For the comprehensive income, the following tax rates are applicable:
In terms of the Individual Income Tax Law, the total amount of comprehensive income is not fully taxable and there are several deductions that are available, such as:
- Standard deduction – a deduction of RMB 5,000 per month
- Itemized deductions – these include children’s educational expense, further education expenses, medical expenses for critical illness, interest expense on mortgages, rental expense for housing, interest expense for mortgages and expenses incurred for dependent elderly
For foreigners residing in China, they are able to make use of a so called ’special allowances’ deduction instead of using the itemized deductions. The special allowances deduction includes a tax deduction for housing rent, costs of relocation, a return flight home and laundry expenses. The special deduction policy was set to expire on 31 December 2021 but was extended for a further two years until the end of 2023.
Once the comprehensive income has been adjusted with either the standard deductions or the special deductions, the taxable income can then be determined. For a more practical perspective on how the deductions work, take a look at our individual income tax calculator.
WHO IS EXEMPT FROM THE ANNUAL IIT FILING?
Certain individuals may be exempt from the annual IIT filing for comprehensive income received during 2021 if one or more of the following circumstances apply:
- An individual’s annual comprehensive income received during the course of 2021 is less than RMB 120,000
- An individual’s annual tax reimbursement amount is less than RMB 400
- An individual has made a pre-tax contribution amount that is amounts to their annual tax payable and they do not need to apply for an annual tax refund
An important point to note is that if a withholding agent is responsible for withholding the IIT on behalf of an individual and they fail to do so correctly, the individual will not be exempted from the filing.
PROCESS OF THE IIT FILING IN 2023
The annual IIT filing for a specific year is generally completed between 1 March and 30 June of the following year. For example, the annual IIT filing for 2022 is to be completed between 1 March and 30 June 2023.
If an individual is not domiciled in China or intends on leaving before this period, he or she is required to settle the annual IIT filing before their departure.
There are 3 methods in which an individual can do their annual Individual Income Tax filing, namely:
- Individually: the annual filing can be done by the individual personally.
- Withholding agent – the annual filing can be done by a withholding agent on behalf of the individual
- Outsourced agent – The individual can use an outsourced agent through a power of attorney
THE CHANNELS AN IIT FILING IS COMPLETED THROUGH
There are three channels through which the annual IIT filing process can be completed, namely:
- Online application (which includes the mobile personal income tax application)
- Direct filing is completed at the tax office
- Through the mail, where the application is posted to the relevant tax office
While the online application provides an easy to use, streamlined service, only foreigners with permanent residency can immediately register to use the app. For foreigners who do not have permanent residency, they will be required to register at the tax office to be able to use the app. This is generally done relevant tax bureau of the withholding agent.
For all applications done by mail, an individual will be required to supply all the information on the income taxes paid for the relevant year. The application must then be posted to the tax authority in the district in which their employer is registered. If there is no employer, the application must then be sent to the tax authority in the district where the individual’s residence has been registered.
WHAT HAPPENS ONCE THE APPLICATION HAS BEEN SUBMITTED?
Once the application has been submitted, if the individual has submitted the correct amount of taxes for the year, then the account is balanced and can be submitted.
If an individual is eligible for a refund, they must then provide information for their China based bank account. If an individual paid personal income tax in advance, however their income did not exceed RMB 60,000 and as such was not taxable, the refund is processed through a simple declaration form. However, if the refund is due to other reasons, the tax authorities will review the information and thereafter determine whether they accept the IIT reconciliation declaration and then only permit the refund.
Individuals who did not pay a sufficient amount of taxes over the previous year will be required to supplement the outstanding amount. The outstanding amount can be paid through online banking, by bank card at the tax office, directly at a bank or through other institutions.
With the annual IIT declaration period now upon us, it is important for individuals to have a comprehensive understanding of their tax contributions over the previous year and whether the annual IIT filing needs to be completed. Employers should provide their employees with the necessary support through the annual IIT filing process and should supply them with all the necessary information. Additionally, the employer should either complete the filing for them or help them understand the process in order for the employees to be able to carry it out by themselves.
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