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backGLOBALtalk April, 2012

China: Tightening reporting and collection of social security contributions

On November 15, 2011, the Ministry of Human Resources and Social Security (MOHRSS) issued the “Administrative Measures on the Reporting and Collection of Social Security Contributions” in draft form (“Draft Regulation”) and sought public consultation before December 15, 2011. This Draft Regulation was enacted based on the new social security law and “The Tentative Administrative Measures on the Reporting and Collection of Social Security Contributions” promulgated in year 1999, which used to govern the social security matters in the PRC.

The Draft Regulation aims at enhancing the practical administrative measures on reporting and collection for employers, employees, and independent individuals. The Draft Regulation has emphasized the employers’ withholding obligations on social security contributions and reiterated that compulsory enforcement measures will be taken against noncompliance.

Key implications

As compared with the existing regulations, the Draft Regulation contains a couple of important changes highlighted as follows:

Extension of the coverage of compulsory contributions – The Draft Regulation explicitly extends the coverage of the compulsory contributions from the current three categories (i.e., basic pension, basic medical insurance, and unemployment insurance) to five, which include work-related injury insurance and maternity insurance as well.

Emphasize the social security assessment process – In addition to the reporting and collection processes as stipulated in the existing regulations, the Draft Regulation specifically emphasizes the assessment process of the social security contribution base, which is to be implemented by local social security authorities.

It is also clearly stipulated in the Draft Regulation that local social security authorities will be acting as the responsible authorities for supervision over certain social security related matters, including social security reporting and the assessment of the contribution base, etc.

Social security reporting and withholding obligations imposed on employers – The Draft Regulation highlights the social security reporting and withholding obligations of the employers.

Employers are obliged to report and make social security contributions to the local social security authorities on a monthly basis and settle payment within the timeline as stipulated. For newly hired employees, employers should complete the reporting within 30 days from the commencement date of employment.

The employers should fulfill withholding obligations on employees’ social security contributions in a timely manner. Otherwise any contributions due will be subject to late payment surcharges and, potentially, penalties imposed by social security authorities.

Compulsory enforcement measures against noncompliance activities – Employers that fail to fulfill monthly reporting and payment obligations, fail to make social security contributions in time, or intentionally underreport social security contributions would be subject to the following compulsory measures as stipulated under the Draft Regulation:

- The social security authorities are required to issue a notice within 10 days from the social security contributions due date to chase for a back reporting and request for the outstanding payments to be settled within 15 days from the issuance of the notice. The notice will inform that any further delay after the stipulated date will be subject to late payment surcharges and penalties imposed by local social security authorities.

- If the employers still fail to make the contributions within the date stipulated in the notice, the social security authorities will work with the employer’s bank and other government authorities to ensure the contributions are settled through compulsory manners.

Legal responsibilities and exposures of employers’ noncompliance activities. – The Draft Regulation specifically highlights the legal responsibilities and exposures over employers’ noncompliance activities on social security manners as follows:

- Failure to fulfill monthly reporting obligation – Employers will be requested to perform a rectification within a prescribed timeframe. The in-charge personnel of the employers could be subject to a penalty of up to RMB 10,000.

- Intentional under reporting of the total remuneration or headcount of employees – Employers will be empowered to rectify and fulfill the social security obligation. A penalty of 100% to 300% based on a discrepancy of actual remuneration against the total remuneration reported could be imposed on the employer at the same time.

- Failure to settle the social security contributions in a timely manner – In addition to the late payment interests that would normally be imposed at 0.05% per day on the underpaid contributions, employers would also be liable for a penalty from 100% to 300% of the contributions overdue.

Deloitte’s view

With the announcement of the new social security law, the PRC social security authorities have taken step-by-step measures through a series of implementations guidance in order to standardize the procedures as well as intensify administration and collection of social security contributions on a national basis. The Draft Regulation is one of these compliance enforcement efforts with the intention to emphasize withholding obligations of employers from a social security perspective and impose compulsory and punitive measures over noncompliance.

The Draft Regulation was announced on November 15, 2011, for public consultation before December 15, 2011. But ambiguity remains in respect of when this Draft Regulation will be finalized and implemented. Moreover, since the new social security law together with the “Provisional Measures for Foreigners to Participate in the PRC Social Security System” have extended mandatory social security coverage to foreign individuals working in the PRC, it is anticipated that once the Draft Regulation is finalized, it would apply for both PRC and foreign national employees. According to a press conference held by MOHRSS in late October, it is expected that a new scheme for implementation of mandatory social security contributions imposed on foreign individuals will be launched by authorities throughout China by the end of this year.

Practically, in recent years, an increasing number of local social security bureaus have also conducted audits with selected entities in many jurisdictions which covers both domestic and multinational companies.

In view of the above, we would recommend companies to:

- Closely monitor the recent social security legislation development and review the existing internal social security administration procedures; and

- Establish proper internal social security administration procedures on a going forward basis to manage risk exposures.

Source: Deloitte - GAI

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