Features of the Chinese Personal Annual Income Tax Settlement

updated on 17 September 2021 | reading time approx. 3 minutes

After the implementation of the new Individual Income Tax Law on January 1 2019, the way of calculating individual income tax in China was changed to a taxation system combining the comprehensive income tax system and the categorized income tax system. The income from wages and salaries, remuneration for labor, author's remuneration, and royalties have been included in the comprehensive annual income and shall be subject to the annual Individual Income Tax (IIT) settlement. Therefore, the annual IIT settlement system was thus born. It is worth noting that business income, property transfer income, rental income, dividend income, and incidental income are still subject to taxation by category and do not fall under the scope of the annual settlement system.

I. Who to do and How to do annual the IIT settlement?

The annual IIT settlement is the most convenient way to apply for a tax refund, when the taxpayer:

1. has a comprehensive annual income of less than RMB 60,000 but has already prepaid IIT during the year;
2. is eligible for special additional deductions but fails to claim the deduction during tax prepayment;
3. does not fully deduct the standard deductions of RMB 5,000 per month due to starting employment in the middle of the year, retirement, or no income for some months;
4. does not have an employer and only receives remuneration for labor, author's remuneration, or royalties, who needs to apply various pre-tax deductions through annual settlement;
5. receives remuneration for labor, author's remuneration, and royalties, where the withholding tax rate applied to remuneration is higher than the annual applicable tax rate for the comprehensive income;
6. fails to declare the tax benefits during the prepayment for individual income tax;
7. has qualified charitable donation expenditure but fails to declare the amount during tax prepayment, etc..

The taxpayer is subject to annual IIT settlement, if the comprehensive annual income exceeds RMB 120,000 and the annual overdue tax is more than RMB 400, when the taxpayer:

1. receives wages and salaries income from more than one employers who deducted the standard deduction (RMB 5,000 per month) repeatedly when withholding tax;
2. has remuneration for labor, author's remuneration, and royalties in addition to wages and salaries income, and a higher annual comprehensive tax rate shall be applied on the total income than the withholding tax rate etc..

Chinese resident taxpayers can prepare the annual IIT settlement in three different ways, i.e. self-declaration, declaration via authorized withholding agent, or declaration via authorized tax agency between January and June of the following year.

II. What are the similarities and differences of China's annual IIT settlement system compared to other countries?

In terms of filing routes:

The way of China's annual IIT settlement is the same as the current mainstream international IIT settlement method, which adopts declaration via authorized withholding agent and tax agency, and self-reporting. Many resident individuals choose to authorize tax agents to file their returns in countries such as the United States and Germany. The service fees paid by taxpayers to tax agents are deductible before tax. In China, as the Chinese tax bureau has developed a series of convenient online self-reporting channels such as the "WEB terminal of the e-Tax Bureau for individuals", the "Individual Income Tax App" and the "Tax Management System for Tax Withholding and Payment", taxpayers with a simple income structure may also choose to file their returns by authorizing the withholding agents or self-reporting.

In terms of tax payments and refunds:

Chinese taxpayers can use their own or other people's bank accounts to conveniently complete tax payments online through UnionPay or third-party payment platforms. Meanwhile, they can also visit competent tax bureau to print payment vouchers and bring them to the bank counters to pay their taxes.

However, when it comes to tax refunds, the Chinese tax system can only accept the tax refund to the taxpayer's personal bank account in China, or the taxpayer can collect the tax refund in cash from the tax authorities in person, which means that the taxpayers cannot receive the tax refund if they left China and their bank account in China has been closed.

Suppose foreigners want to remit the tax refunds to their overseas accounts, in this case, they need to submit a series of documents, such as IIT certificates, payroll slips, employment contracts, work permits, etc. in China to the local bank to prove that the income is genuine. In other countries, such as New Zealand, there are more ways for taxpayers to get a tax refund, including refunding to their bank account, using it to offset the following year's withholding tax, paying other taxes, paying student loans, etc..

In terms of deadlines:

It is impossible to postpone the deadline for annual IIT settlement in China or apply to extend the processing period. If a tax settlement is filed after the deadline and has overdue tax, the tax office will charge a late payment fee of 0.05% for each day of delay and may affect the individual's credit rate. In Germany, on the other hand, taxpayers can apply for an extension of their annual tax settlement for special reasons by mail or electronical method with the tax office, usually for 1-4 months, depending on the circumstances.

In terms of supervision:

With the signing and implementation of the Common Reporting Standard (CRS), China has introduced the automatic exchange of tax-related information on global financial accounts for Chinese tax residents. This indicates that the Chinese tax authorities now turning their attention to wealthy groups of individuals and their global income We recommend taxpayers in China, especially those with overseas assets or income, pay attention to the relevant tax regulations. In general, for complex and cross-border assets and income, competent advice should be sought from a tax advisor or tax firm (specialized on international taxation) in order to comply with all tax-related compliance requirements.

In terms of taxation units:

Both United Kingdom and Germany use the family as the unit of taxation for tax settlement reporting, taking into account the non-income individuals and the inherent expense in the family. China, on the other hand, still uses the individual as the unit of taxation. Although the integrity of fairness is not as good as that of the western countries that use the family as the taxation unit, considering the large population and the complexity of geographical and cultural differences in China, at this stage, using the individual as the taxation unit may be the only operational option available to the Chinese tax authorities.

Since the implementation of the new Individual Income Tax Law in 2019, China's annual IIT settlement has gone through 2 years. In general, the "Individual Income Tax App" is relatively simple to use, easy to understand and constantly being optimized, nevertheless, the items allowed for IIT deductions in China are still limited and need to be improved in the future.