NEW TAX BRACKETS AND SPECIAL ITEMIZED DEDUCTIONS UNDER THE NEW IIT LAW

By Tanny Chow, Stone Compass Associates

January 21, 2019

In China, the new Individual Income Tax (IIT) law and relevant amendment have already taken effect by 1 January 2019. In this article, we will cover some of the major changes made.

 

TAX BRACKETS REVISED

On 29 June 2018, The National People’s Congress (NPC) of China published a draft amendment of the IIT, which was then passed on 31 August. Phase 1 of the change, already in effect from 1 October 2018, mainly increased the tax exemption threshold from RMB 3,500 to RMB 5,000 per month (or 60,000 per year). The tax brackets are also lowered. Below is the new table illustrating new tax threshold limits and associated tax rates on comprehensive income effective 1 January 2019. 

Bracket Annual taxable income (RMB) Rate (%)
1 Up to 36,000 3
2 Exceed 36,000 and up to 144,000 10
3 Exceed 144,000 and up to 300,000 20
4 Exceed 300,000 and up to 420,000 25
5 Exceed 420,000 and up to 660,000 30
6 Exceed 660,000 and up to 960,000 35
7 Exceed 960,000 and above 45

SIX SPECIAL ITEMIZED DEDUCTIONS ADDED

The IIT Special Deduction Procedure (Trial Implementation) was announced on 21 December 2018. It introduces new special deductions applicable to both domestic and expatriated employees (more details below). The table below depicts the six categories of special itemized deductions.

Item

Deduction category

 

Application scope

Deduction amount (RMB)

Deduction method

1

Children’s education

Pre-school, compulsory education, intermediate education, higher education

1,000 per child per month (or 12,000 per child yearly)

Standard amount,

50/50 split between spouses, or 100% by either parent

 

2

Continuing education expenses

Academic education

400 per month (or 4,800 yearly)

Standard amount,

Up to 48 months if for the same degree course,

Optional for parent to claim on behalf of child

 

Technical or professional qualification

3,600

Standard amount,

In the year in which certification is obtained

 

3

Medical  expenses for critical illness

Expenses recorded in the social medical insurance management system,

 

Above 15,000 and capped at 80,000 yearly

Actual amount incurred,

Deductible by either taxpayer or spouse,

For a child, can be deducted by either parent

 

4

Housing mortgage interest

First residential property of the taxpayer or spouse, or

Interest on commercial or provident fund loan

1,000 per month (or 12,000 yearly)

In the year in which loan interest incurs,

Up to 240 months

5

Housing rental

Municipalities, provincial capital cities, plan-listed cities and other, as marked by State Council, and the taxpayer does not own housing in the main city of employment

 

1,500 per month (or 18,000 yearly)

Standard amount,

Deductible 100% by taxpayer who signed the lease if both spouses work in the same city,

Claimable by both spouses if working separately in different cities

 

Cities with population of more than 1 million, and the taxpayer does not own housing in the main city of employment

 

1,100 per month (or 13,200 yearly)

 

Standard amount,

Deductible 100% by taxpayer who signed the lease if both spouses work in the same city,

Claimable by both spouses if working separately in different cities

 

Cities with a population of less than 1 million, and the taxpayer does not own housing in the main city of employment

 

800 per month (or 9,600 yearly)

Standard amount,

Deductible 100% by taxpayer who signed the lease if both spouses work in the same city,

Claimable by both spouses if working separately in different cities

 

6

Caring for the elderly dependent

Parents above sixty years old, or

Other statutory grandparents

 

 

2,000 per month (or 24,000 yearly)

 

Standard deduction if claimed by one sibling

 

Up to 1,000 (or 12,000 yearly)

Claimable per sibling if deduction divided

IMPACT ON EXPATRIATED EMPLOYEES

Prior to 1 January 2019, expatriated employees were eligible to claim certain tax-exempt personal allowances some of which include housing accommodation, laundry, flight ticket for home visit, education ,etc. With the implementation of the new IIT law, foreign employees can continue to claim such allowance up to the end of year 2021. Between 2019 and 2021, foreign employees can opt for either option: personal allowances or itemized deductions. The option once chosen must be followed through during a calendar year. After 2021, both foreign and domestic employees adhere to the same IIT law.

 

At present, local tax authorities still require more time in determining a proper mechanism in managing the newly introduced deductions. It is advised both employers and employees should observe the relevant guidelines and any subsequent updates, and consult their advisors for details.

 

Have a question? Get in touch with Stone Compass for a consultation at info@stone-compass.com