Expats losing tax advantage ... at last
By Zhang Fengming |
August 18, 2011, Thursday
|
Print Edition
Print Edition
China's new tax relief program, which comes into effect on September 1, will mean that people can keep more of the money they earn in their pockets before taxes kick in. All people, that is, except expatriate workers.
Under the tax reform plan, the standard tax threshold for expats will remain at 4,800 yuan (US$750) a month, while for Chinese workers it rises to 3,500 from 2,000 yuan.
Although still better off than their Chinese counterparts, expats are grumbling that they got no benefit under the tax relief program that was designed to help ease the burden of inflation, now at a three-year high.
"The standard monthly threshold for expats has remained at 4,800 yuan for the past five years," said Joyce Xu, a partner at Deloitte. "Clearly, the expat population has not benefited from the increase of the exemption threshold and this does lead to a perception among many expats that the overall tax burden has increased since they, too, are under the same inflationary pressures."
Under the present system with the standard deduction at 2,000 yuan, expats are accorded an extra 2,800 yuan in their minimum tax threshold. When the deduction rises to 3,500 yuan next month, the "extra" for expats will drop to 1,300 yuan.
"We've received a lot of inquiries from clients about the expat deduction," said Freeman Bu, an Ernst & Young partner in Shanghai. "They argue that the cost of living is also rising for them as well as for Chinese."
July inflation hit 6.5 percent, a 37-month high.
The income threshold for Chinese workers is not the only thing changing next month. Tax brackets are also being adjusted.
China now levies individual income tax progressively in nine brackets, ranging from 5 percent to 45 percent. From September 1, the 15 percent and 40 percent brackets will disappear, and the 5 percent rate will be reduced to 3 percent.
"The primary objective of tax relief is to reduce the tax burden for lower-income groups, while increasing moderately the tax burden for high-income groups," Deloitte's Xu said.
"Expats are traditionally regarded as the 'high income group' as such," she added. "The new individual income tax law doesn't provide any visible relief for that group."
Majority pay more
Ernst & Young's Bu said that expats earning more than 17,400 yuan a month would pay more under the new tax system, which effectively means "the majority of expatriates will have to pay more tax." For Chinese, those earning 38,600 yuan a month or more will pay more tax.
Under the new system, high-income Chinese could pay an extra 1,195 yuan in tax every month, while high income expats could pay 1,870 yuan more, Bu said.
"The new tax system does seem to be harsher to most expats," he said.
Small wonder that many expats are grousing.
A casual survey of foreign staff employed by Shanghai Daily found some of them complaining that expats are already ripped off in higher rents and other living costs. They said expats should enjoy comparable tax relief with their Chinese counterparts.
Most Chinese would beg to differ. I talked to three of my friends who think expats have been enjoying deferential treatment long enough - a throwback to the time when China was desperate for foreign help in its modernization campaign.
Ramon Gu, a lawyer in Shanghai, said he sees a trend toward equalization between Chinese and expat workers where taxes are concerned.
"The expats have enjoyed more tax benefits than Chinese. Why should they still be grumpy?" Gu said. "China is already very considerate to expats."
Gu, who once worked in Hong Kong, said the tax levy there is the same for all taxpayers, whether from Hong Kong, the Chinese mainland or Western countries.
Information technology engineer He Gaoning agreed, noting that he had to pay the same tax rate as the French when he was working in France.
A third friend, website editor Gu Bin, said China has come a long way in equalizing corporate taxes between Chinese and foreign companies.
It makes sense, he said, to see the tax gap also narrowing between expat and Chinese individuals.
Since 2008, China has levied the same rate of 25 percent on foreign and Chinese companies. Before that, Chinese companies were subjected to a rate of 33 percent, while foreign companies enjoyed various deductions that cut their de facto levy.
Ernst & Young's Bu said China's tax reform on personal income is merely the next step moving in that same direction.
"It won't be a one-off elimination of the gap," Bu said. "But I think that maybe in several years there won't be a gap at all on individual income taxes."
China set the individual income threshold at 800 yuan in 1980, when that kind of pay was still a pipedream for most Chinese. Those were the days when China pulled out all the stops to attract foreigners to work in what was then a much more backward country with few amenities to offer.
In 1987, China granted a 50 percent exemption on the expat income tax. That concession was scrapped in 1994 and replaced by a 3,200-yuan deduction over the Chinese deduction amount.
The additional deduction benefit was kept unchanged until 2008, when the threshold for Chinese was rising and the differential for expats was cut to 2,800 yuan.
Deloitte's Xu argues that China still needs foreign expertise as it tries to build modern financial and business structures.
"To better attract international talent, it is important that expats are provided with reasonable tax relief and an appropriate balance is struke between the need to alleviate the tax burden for the less well off and the need not to overtax expats unduly," she said.
Under the tax reform plan, the standard tax threshold for expats will remain at 4,800 yuan (US$750) a month, while for Chinese workers it rises to 3,500 from 2,000 yuan.
Although still better off than their Chinese counterparts, expats are grumbling that they got no benefit under the tax relief program that was designed to help ease the burden of inflation, now at a three-year high.
"The standard monthly threshold for expats has remained at 4,800 yuan for the past five years," said Joyce Xu, a partner at Deloitte. "Clearly, the expat population has not benefited from the increase of the exemption threshold and this does lead to a perception among many expats that the overall tax burden has increased since they, too, are under the same inflationary pressures."
Under the present system with the standard deduction at 2,000 yuan, expats are accorded an extra 2,800 yuan in their minimum tax threshold. When the deduction rises to 3,500 yuan next month, the "extra" for expats will drop to 1,300 yuan.
"We've received a lot of inquiries from clients about the expat deduction," said Freeman Bu, an Ernst & Young partner in Shanghai. "They argue that the cost of living is also rising for them as well as for Chinese."
July inflation hit 6.5 percent, a 37-month high.
The income threshold for Chinese workers is not the only thing changing next month. Tax brackets are also being adjusted.
China now levies individual income tax progressively in nine brackets, ranging from 5 percent to 45 percent. From September 1, the 15 percent and 40 percent brackets will disappear, and the 5 percent rate will be reduced to 3 percent.
"The primary objective of tax relief is to reduce the tax burden for lower-income groups, while increasing moderately the tax burden for high-income groups," Deloitte's Xu said.
"Expats are traditionally regarded as the 'high income group' as such," she added. "The new individual income tax law doesn't provide any visible relief for that group."
Majority pay more
Ernst & Young's Bu said that expats earning more than 17,400 yuan a month would pay more under the new tax system, which effectively means "the majority of expatriates will have to pay more tax." For Chinese, those earning 38,600 yuan a month or more will pay more tax.
Under the new system, high-income Chinese could pay an extra 1,195 yuan in tax every month, while high income expats could pay 1,870 yuan more, Bu said.
"The new tax system does seem to be harsher to most expats," he said.
Small wonder that many expats are grousing.
A casual survey of foreign staff employed by Shanghai Daily found some of them complaining that expats are already ripped off in higher rents and other living costs. They said expats should enjoy comparable tax relief with their Chinese counterparts.
Most Chinese would beg to differ. I talked to three of my friends who think expats have been enjoying deferential treatment long enough - a throwback to the time when China was desperate for foreign help in its modernization campaign.
Ramon Gu, a lawyer in Shanghai, said he sees a trend toward equalization between Chinese and expat workers where taxes are concerned.
"The expats have enjoyed more tax benefits than Chinese. Why should they still be grumpy?" Gu said. "China is already very considerate to expats."
Gu, who once worked in Hong Kong, said the tax levy there is the same for all taxpayers, whether from Hong Kong, the Chinese mainland or Western countries.
Information technology engineer He Gaoning agreed, noting that he had to pay the same tax rate as the French when he was working in France.
A third friend, website editor Gu Bin, said China has come a long way in equalizing corporate taxes between Chinese and foreign companies.
It makes sense, he said, to see the tax gap also narrowing between expat and Chinese individuals.
Since 2008, China has levied the same rate of 25 percent on foreign and Chinese companies. Before that, Chinese companies were subjected to a rate of 33 percent, while foreign companies enjoyed various deductions that cut their de facto levy.
Ernst & Young's Bu said China's tax reform on personal income is merely the next step moving in that same direction.
"It won't be a one-off elimination of the gap," Bu said. "But I think that maybe in several years there won't be a gap at all on individual income taxes."
China set the individual income threshold at 800 yuan in 1980, when that kind of pay was still a pipedream for most Chinese. Those were the days when China pulled out all the stops to attract foreigners to work in what was then a much more backward country with few amenities to offer.
In 1987, China granted a 50 percent exemption on the expat income tax. That concession was scrapped in 1994 and replaced by a 3,200-yuan deduction over the Chinese deduction amount.
The additional deduction benefit was kept unchanged until 2008, when the threshold for Chinese was rising and the differential for expats was cut to 2,800 yuan.
Deloitte's Xu argues that China still needs foreign expertise as it tries to build modern financial and business structures.
"To better attract international talent, it is important that expats are provided with reasonable tax relief and an appropriate balance is struke between the need to alleviate the tax burden for the less well off and the need not to overtax expats unduly," she said.
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