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September 18, 2009

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Year-end bonuses to be taxed at lower rate

TAXPAYERS in China are getting a break as the State Administration of Taxation yesterday said it will begin taxing year-end bonuses at a lower rate reflecting their one-time status.

The clarification was made after the administration said it scrapped its previous practice of levying tax on year-end bonuses on August 31. At the time it did not clarify its new practice.

"The new practice reduces the tax burden," the administration said.

In the new practice, the year-end bonus is deemed a one-off yearly bonus that can be divided by 12 to determine the tax rate.

For example, an individual's year-end bonus is 14,800 yuan (US$2,167), equivalent to the monthly salary. Under the new practice, the tax rate is 10 percent of 1,233 yuan (14,800/12). Thus the person owes 1,455 yuan in tax on the bonus.

Under the old practice, a tax rate of 20 percent applied, and the individual owed 2,585 yuan in tax on the bonus.

Yesterday's clarification came a day after waves of media coverage reported the tax authority would levy a tax on fringe benefits such as allowances for telecommunications and transport bills, as well as commercial insurance policies.

However, the administration didn't clearly define such allowances yesterday.

"It's not that they were tax-free previously and taxable now," it said.

Income tax rules in general list salary, allowances, bonuses and any other income related to employment, or fringe benefits, as taxable income, whether in cash, coupons, goods or other benefits.

However, it doesn't go into detail on the definition of fringe benefits.


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