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How Do Foreigners Avoid to Be Resident Taxpayers in China?

HiTouch 10 December 2018

Our article today is a pretty serious one regarding the topic of resident taxpayers and non-resident taxpayers in China. Regardless of whether you are teaching English, own your own business or work for one of the big multinationals, if you stay in China for a prolonged period of time, you are likely to have become a resident taxpayer.

 

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Image: .caixinglobal

 

In this article, we will present an in-depth interpretation about what you would face under dual tax statuses, according to the Chinese banks' recent requirements for bank account holders.

 

What Happened to Bank Account Holders Recently?

Bank account holders recently may have received a message from their Chinese bank regarding the declaration of their tax status in China. What does it mean to you and what should you do next? 

 

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Here is what the message is about:

According to the requirements of the Administrative Measures of Due Diligence Procedures in Financial Account Information in Tax Matters for Non-residents in PRC, if you are a resident taxpayer in China, please go to the bank in person or designate someone to sign the document regarding the tax resident declaration before December 31, 2018.

 

If you fail to make the declaration before the deadline, the bank would consider to hold the status of a non-resident taxpayer and truthfully report your financial account information to the Chinese tax authorities according to the status of non-tax resident.

 

Are You a Resident Taxpayer in China?

Foreigners living and working in China will now be subject to the 183-day test from January 1, 2019 —a rule that draws upon recognized international practices. This test deems a foreign individual who resides in China for 183 days or more in a year a ‘resident’ and subjects them to Chinese tax on their worldwide income.

 

How to determine the tax identity of foreign individuals?

Resident taxpayers

Foreign individuals reside in China  183 days (within a tax year

Non-resident taxpayers

Foreign individuals reside in China  183 days (within a tax year


What is The Major Difference Between a Resident Taxpayer and a Non-resident Taxpayer?

A foreign individual who resides in China for 183 days or more in a year is a ‘resident’ and this subjects them to Chinese tax on their worldwide income.

 

Income sourced within/outside of China is determined by the individual’s actual working period within China, regardless of whether the employer paying the income is based in China or not.

 

The graphic below displays the calculation of CURRENT taxable income for foreign individuals. Under this category, if a foreigner living in China more than 90 days but less than 183 days, income sources outside of China is not subject to IIT. This will change if foreign individuals switch their tax status to resident taxpayers.


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How Does China Know About Your Worldwide Income?

We do know some expat employees working in China are having their salaries “split” by their Chinese or foreign company employers. There is an increase in Chinese company employers hiring expats with the promise that they will get paid 30 percent in China and 70 percent in Hong Kong or some other country.

 

What your employer has done here is 100% illegal and it puts you at risk. Both you and them are engaging in tax fraud but all that should matter for you is that you are engaging in tax fraud.

 

According to Dan Harris, a leading authority on legal matters related to doing business in China, China now employs various techniques to crack down on this sort of thing and in response to that it has become way less common to see a foreign company engage in such fee splitting. One of its best and easiest techniques is to simply call bullshit on the idea of a company being able to pay a top-tier expat software engineer $30,000 a year.

 

The other is to offer a tax amnesty to your just- terminated employee to get him or her to report your tax fraud. Then armed with that, China will not so politely demand you immediately pay it all past taxes and benefits, plus interest, plus massive penalties.

 

How to Escape from Being a Resident Taxpayer in China?

An expatriate leaves China for more than 30 days consecutive or 90 days cumulative a year is considered a non-resident taxpayer and does not have to pay taxes according to the law that is applicable to resident taxpayers.

 

However, There Is Another Game for you!

Let's go back to that complex Administrative Measures of Due Diligence Procedures in Financial Account Information in Tax Matters for Non-residents in PRC. What is it exactly?

 

It is a more specific action for the global financial institutions under the guidelines of the Common Reporting Standard (CRS) and Automatic Exchange Of Information (AEOI), which both are carried out by Organisation for Economic Co-operation and Development (OECD).

 

China is one of the 100 hundred countries(regions) that have joined the CRS and AEOI tax scheme. They aim to take a further major step towards increasing tax transparency.

 

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Image: Research from Organisation for Economic Co-operation and Development (OECD)

 

If you are a resident taxpayer of one of the above jurisdictions, unluckily for you the Chinese tax authority ditched you the same way as you gave up being a resident taxpayer in China. They submit and exchange your tax information to the jurisdiction that you belong to.

 

Banks in China have to report certain account information for that account holder to the Chinese tax authority, that pretty much explains why you have received the message from the bank that required you to declare your tax status. The information below is collected by banks in China:

 

  • name

  • date of birth

  • taxpayer identification number of the account holder

  • the bank account number

  • account balance

  • interest earned

 

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Image: Google. The procedure of financial information exchanged between AEOI countries(regions)

 

 

The Chinese tax authority then exchanges the information with the relevant overseas tax authority. So your wealth in China is transparent to the overseas tax authorities among these jurisdictions. They have the right to levy tax from you accordingly.

 

Your Choice! Whether Being a Resident Taxpayer in China.

Either choosing for being a resident taxpayer or non-resident taxpayer, you have to pay tax on your income. What you can do is to compare the payable tax that required by Chinese and other tax authorities, and choose a tax status.

 

China has signed treaties with some counties on the avoidance of double taxation. Under today's complex tax rules among so many countries, it may happen that the same income is being taxed twice – the country of the source where the income arises and the country of residence where the income is received.

 

We would like to remind you of China's new individual tax system at the end, it has ended plenty of tax exemptions for foreigners. Under the new system, both foreigners and Chinese pay individual income tax according to their tax status, not their nationality. To some extents, it takes a tougher stand against foreign resident taxpayers in China.

 

Reference: China Law Blog