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backGLOBALtalk December, 2009
China Rising: the Growing Global Mobility of Its Human Capital
The People's Republic of China has the world's largest population (over 1.3 billion people). This makes human capital an abundant resource in China. It has long been recognized that companies could tap into China's vast and relatively lower-cost labour market, attracting foreign and domestic investors alike to set up facilities in China. Indeed, it has been one of the driving factors contributing to China's continuous growth and has helped turn the country into the world's manufacturer. Turn over any store-bought item today, and chances are the product was made in China.
China's economic growth story has continued despite the global economic recession. In the first two quarters of 2009, the country's gross domestic product (GDP) increased 7.1 percent in comparison to prior year.2 The rapidly developing economy has, in turn, transformed the nature of China's human capital.
China's labor force is becoming increasingly more urban, skilled, educated, and generally more talented. Companies have already begun hiring Chinese nationals for roles in China that were once reserved for the foreign expatriate. Furthermore, companies are also employing Chinese nationals abroad. Chinese nationals are sent on work assignments to related companies overseas. They are hired directly out of university and college programs for work in companies overseas. Chinese nationals are sent abroad to acquire managerial skills, technical expertise, or receive overall training. For all the reasons that expatriates from other countries are generally sent abroad, Chinese nationals are also becoming increasingly more global.
This increased mobility and growing presence in the global labor market create issues and challenges for Chinese mobile employees, their employers, and governmental authorities.
Individual Income Tax Issues
A Chinese national holding a passport and/or household registration of the People's Republic of China is generally considered a domiciled individual of China. As a domiciled individual, the Chinese national is subject to taxation on worldwide income. In other words, income from all sources regardless of the location of payment is subject to China's Individual Income Tax (IIT). This is contrary to an often erroneous understanding some may have that Chinese nationals are no longer liable for tax once they are working outside of China.
What does this mean for those Chinese nationals working overseas either hired directly by the foreign company or sent on assignment? Simply stated, they are still subject to IIT even while working outside of China.
Monthly Withholding Tax Returns
China's tax regime is based primarily on a monthly tax filing system. In general, actual taxes are calculated each month, and the paying entity (i.e., the employer) is responsible for making the tax withholding and submitting the individual income tax to the local tax authorities. Tax filing and payments are due by the seventh day after the close of the month with no extensions. In addition, tax collection is administered by local jurisdictions and employing entities are assigned to specific local tax bureaux.
Each of the steps related to monthly filing may pose practical problems for the overseas Chinese national as well as the company. For instance, conflicting payroll schedules may make it difficult to meet the monthly filing and payment deadlines. For Chinese nationals hired directly by a foreign company, they likely would not have an assigned local tax bureau to handle the tax filing and payment procedures. This creates the issue of identifying the appropriate local tax bureau to satisfy the tax filing obligations.
If the company is not available to perform tax withholding and tax filings, then the Chinese individual should be responsible for satisfying the monthly tax filing requirements. Of course, if the assignee is outside of China, this generally makes a monthly tax filing obligation impractical or nearly impossible to comply with from an administrative standpoint.
However, ignoring the responsibilities of satisfying tax filing requirements is not the answer. Each scenario should be handled on a case-by-case basis, often working with the tax bureau to find a resolution that facilitates compliance with China's tax law, yet, is practical for the employment arrangement outside of China. This may involve concessions to file annual tax reconciliations or to report via the annual individual income tax filing. Finally, as monthly withholding is generally the responsibility of the payer of income, foreign employers hiring Chinese directly in their own countries should evaluate if they have any withholding obligations in satisfying the individual's IIT liability.
Annual Individual Income Tax Return
China introduced an annual individual income tax return filing system effective from the 2006 tax year.3 Certain individuals are required to submit an annual tax return even if taxes were duly withheld and paid throughout the course of the year. The annual tax return did not replace the monthly tax filing system. It is an additional requirement.
In general, Chinese domiciled individuals with annual income exceeding RMB120,000, are required to file the return by the 31st of March following the end of the tax year. Similar to monthly returns, no extensions are generally given. In addition, the filing requirements indicate a domiciled individual receiving income from sources outside of China should also file the annual tax return. The return also allows the individual to report, in addition to wage and employment income, amounts for personal income such as interest, dividends, or other income, and certain tax-exempt income.
The tax filing requirement for the annual return rests with the individual, and as mentioned, there is no extension generally given for this return. However, Chinese domiciled individuals working overseas may not have the complete information necessary to file an accurate tax return. Similar to the monthly filings, there may be incomplete payroll information from the host employer or company. Moreover, there may be information that is required (i.e., foreign tax payments or tax returns) from the host country that may yet to be finalized because of a conflicting tax filing schedule.
As with the monthly tax filing, involving the local tax bureau may be necessary to confirm the necessary tax filing procedures for the special situations of those Chinese domiciled individual working overseas.
Social Security Tax Issues
Social security contributions are required for Chinese domiciled individuals working in China. Employer and employee contributions are made to the following social security funds:
- Pension
- Medical insurance
- Unemployment insurance
- Housing
- Maternity
- Injury.
The social security system is administered at the local level. Employer and employee contribution rates can and do vary from city to city. The basis of salary income for purposes of calculating contributions is also different by city. Consequently, the social security benefits are location-specific.
As one can imagine, there are practical implications for those that wish to remain in the social security system while they are employed overseas. Companies in China employing Chinese domiciled individuals locally, who then send the individuals on temporary assignments, may find it easier to continue to contribute to the Chinese system. They may be able to maintain all or part of the individual's payroll in China and contribute to the social security system.
However, foreign companies hiring Chinese domiciled individuals directly outside of China may not have a practical mechanism to contribute towards social security. If the individuals wish to participate in China's social security system, they would need to contribute on a self-contribution basis and this generally would be difficult to do from abroad. As with cases before, methods for contribution would have to be confirmed with the relevant local social security bureau.
Foreign Exchange Issues
Issues relating to foreign exchange are often overlooked where Chinese domiciled individuals are working overseas, particularly if their remuneration is received in foreign currency. Foreign exchange is controlled in China, and the Chinese Renminbi (RMB) is not freely convertible. There is an annual exchange quota of USD 50,000 per individual. To the extent that the amount exceeds the quota, the individual may need to produce employment contracts and relevant certificates to support the foreign exchange requests.4
From a practical standpoint, individuals need to confirm the procedures with their specific banks in China to understand their foreign exchange and remittance requirements specific to their needs. As the individuals are working and physically located in the host country, this may not be too easily accomplished. Companies that continue paying salaries in China may want to consider administering a split payroll and delivering allowances in the host country.
Conclusion
As companies continue to evaluate the potentially attractive prospects of employing talent through domiciled Chinese nationals abroad, they should become familiar with the various issues and challenges identified in this article. Being unaware of the tax and foreign exchange implications may lead to further complications in the future, including obstacles to remitting earnings back to China and give rise to penalties and interest on outstanding tax obligations.
Understanding the obligations of the company, the Chinese national, and the instrumental role of the Chinese tax authorities can help the company devise plans to comply with and effectively implement and practically apply the rules imposed on Chinese nationals working overseas. Navigating the laws administered by various bureaux (i.e., tax, social security, and foreign exchange) may become complex. Companies should aim to be in compliance and in synch with the requirements of each bureau. While some companies may have the capacity to invest significant resources in navigating and contending with the myriad issues and challenges, others may need to consider engaging the support of a professional services firm. Whichever the case, understanding the gamut of requirements, obligations, and opportunities, and establishing an effective framework to handle them, can help preclude future frustration and could allow the company and the Chinese national to focus on the true objectives implementing the company's overseas business strategy and enjoying the experience of working overseas.
Source: KPMG International - GAI
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