Tax Bureau to Collect Social Insurance in 2019: Time for an HR Review in China

On July 23, 2018, China’s Central Committee and the State Council released the Reform Plan on the National and Local Taxation Collection and Management System (“Taxation Collection Reform Plan”).

The Taxation Collection Reform Plan aims to consolidate the collection of national and provincial level taxes, and clarifies ambiguities surrounding which bureau is ultimately responsible for the collection of social insurance contributions.

Set to take effect on January 1, 2019, the plan places the responsibility of calculating and collecting social insurance premiums solely with the tax bureau.

Professional advisors expect the change to improve social insurance compliance. The tax bureau is better resourced to monitor and collect contributions – employers that have not examined their social insurance contributions recently should consider a review.

The reform

Previously, the 1999 Provisional Regulations for the Collection and Payment of Social Insurance Premiums provided that either the social insurance agency under the human resources (HR) bureau or the tax bureau can collect social insurance premiums — an ambiguity that has created inconsistencies from region to region.

As it stands, only 19 regions rely on the tax bureau to collect social insurance contributions. Many other regions – including Beijing, Shanghai, and Tianjin – rely on the HR bureau to either calculate or collect social insurance contributions and will be the ones most affected by this new law.

Social insurance collection is widely expected to be more vigorously enforced as a result of the Taxation Collection Reform Plan, as the tax bureau is better-resourced than the HR bureau and will now have universal remit over the area.

The tightening of social insurance collection is likely the Chinese government’s response to its aging population and rising pension deficit. As China’s population gets older, the government will be under greater pressure – and financial strain – to provide services for the elderly.

According to the plans, the transfer will take place following the sweeping reform of Chinese ministries and government institutions, which includes the merger of national and local tax institutions.

Stricter enforcement anticipated

In theory, all companies should contribute social insurance in full amount and in a timely manner, and the change of collection bureau should not have too much influence.

However, in some instances, companies may make inadequate social insurance contributions on behalf of their employees. For example, an employer might agree to directly pay an employee a higher salary in exchange for not making social insurance contributions, which results in cost saving for the employer.

Under the new law, these illegal practices will be tracked more easily, as the tax bureau possesses more sophisticated calculation and collection capabilities when compared to the HR bureau, especially with the implementation of the Golden Tax III tax control system.

Adam Livermore, a Partner at Dezan Shira & Associates, warns that transferring the social insurance responsibility to the tax bureau will likely give rise to a more precise definition of what ‘salary’ (which determines the social insurance contribution amount) actually consist of, as well as more stringent collection of the levy amount.

Additionally, this reform is likely to ensure a more consistent enforcement of social insurance premium collection. Accordingly, businesses should take this opportunity to conduct a thorough HR compliance review, to ensure their social insurance contributions are legally compliant before January 1, 2019.

Businesses should pay particular attention to:

• Salary and overtime payments;
• Social insurance contributions;
• Work hour systems;
• Work safety requirements; and
• Leaves and holidays.

While foreign businesses may face stricter regulatory enforcement, in the long term the reform may be a positive change for their competitiveness in China.

According to Livermore, the Taxation Collection Reform Plan will make it harder for domestic companies to skirt social insurance obligations, which most foreign businesses already comply with.

“Historically, domestic companies have been more likely than foreign companies to avoid paying the full amount of social insurance, as foreign-invested enterprises (FIEs) have traditionally been met with a greater level of scrutiny.” Livermore said. “These changes should level up the playing field between FIEs and domestic Chinese companies to some extent.”

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