Changes to Chinese Tax
On December 31, 2021, the Chinese Ministry of Commerce and State Taxation Administration jointly announced the extension of the preferential income tax treatment on expatriate fringe benefits through 2023. Prior to the last-minute extension, the provision was set to expire as of January 1, 2022.
Foreign workers in China can continue tax-exempt fringe benefits for housing, children’s education, language training, meal and laundry fees, relocation expenses, business travel, and home leave. These benefits, when reasonable and paid on a reimbursement or in-kind basis, will continue to be exempt from income tax through December 31, 2023.
The two-year extension will provide enormous tax-savings to expatriates working in China, and/or their employers if tax equalization is used.
The New Year’s Eve announcement came after growing concern surrounding staffing stability, as foreign employees became weary about the anticipated additional tax burden on a gross salary approach, in which the employee would bear the additional tax. Conversely, companies on a net salary approach were concerned by the raising employment costs. These concerns were amplified by the continued uncertainty and upheaval of the global pandemic.
The extension will also provide employees and employers time to evaluate employment status, negotiate new terms, and/or make plans to repatriate (and hopefully time for the pandemic to subside). Proactive employers that have already made staffing, policy, and contract adjustments in anticipation of the change may need to revisit those terms, and possibly renegotiate or defer.
Separately, on December 29, 2021, Premier Li Keqiang announced that China will also extend the preferential tax treatment on annual bonuses until the end of 2023. The regime allows for tax on the bonus to be calculated separately, at lower rates, rather than be combined with other comprehensive income.
AIRINC had made plans to overhaul our Chinese tax models and ACE tax logic for expatriate fringe benefits this month for the anticipated changes coming in 2022. The China tax models will now be deferred until the 2022 social security rates and maximums are announced this summer. The ACE tax logic will be changed when the new expatriate tax regime is effective in 2024. As always, the Tax Department will stay informed of developments as they occur.