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September 1, 2009

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13th month salary not to draw full tax

CHINA has dropped the practice of levying full income tax on the 13th month salary, or double pay, as it wants to ensure the tax is fair, said the State Administration of Taxation yesterday.

Before the move, the 13th month pay was subject to full income tax, without deduction.

For instance, social welfare, health and public housing fund and the 2,000 yuan individual income tax threshold can be deducted from a regular monthly salary of 10,000 yuan (US$1,464) before income tax is levied. However, the full income tax was fully levied on the 13th month pay of 10,000 yuan.

The SAT was not available for immediate comment.

As the SAT doesn't usually give a clarification on a new practice, an unnamed tax industry expert with one of the big four accounting firms said there are two possibilities.

One possibility is that the 13th month pay can be deemed as a one-off whole-year bonus, which enjoys a low tax burden.

The pay is divided by 12 months and then taxed. For instance, the taxable income is 833.33 yuan (10,000/12) in the method based on 10,000 yuan monthly salary.

The other option comes with a stricter tax. The 13th month salary can be combined with the December salary for taxation. It means a higher tax with pay being doubled.

"It really depends on the explanation from the local tax man on the practice," said the source. "In practice, both methods can be applied."

Meanwhile, SAT also makes it clear that Chinese studying or working overseas can't be regarded as overseas Chinese to enjoy a bigger tax deduction.

People who obtain property rights in a divorce are exempted from income tax. But if they sell the property later they have to pay income tax on the transaction.


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