Other BriefingsChina Annual IIT Reconciliation – Your Tax Owed Payment FAQs Answered
April, May, and June are the peak season in China for the annual individual income tax (IIT) reconciliation, or the annual IIT settlement as it is referred to commonly. June 30 is the standard deadline for the annual IIT reconciliation process. To help taxpayers smoothly report their IIT status and make the annual IIT reconciliation, we discussed questions on tax refunds in our article published in May 2022. In this new article, we provide information based on our daily consultations with clients regarding tax owed payment. For more questions, please contact Karen Liu, Associate, CAS, Guangzhou Office.
Q1. I am a foreigner and I worked in China for the entirety of 2020. I worked less than one year in 2021, leaving China at the end of March 2021. My salary was RMB 10,000 per month for the whole time. Will this situation have an impact on my 2021 IIT calculation and payment? Does this situation involve tax return or tax owed? How should I file it?
There are two kinds of tax identity for foreigners working in China and each has its own calculation method.
Simply put, those who stay in China for more than 183 days will be regarded as resident individuals, while those who stay less than 183 days will be regarded as non-resident individuals. The company where the foreigner is an employee will evaluate and estimate the ‘days in China’ of the expat and choose the tax identity at the beginning of the year.
In your case, you were originally regarded as a resident individual in terms of your tax identity in 2020 (cumulative period in China is more than 183 days in 2020). While in 2021, you stayed in China for less than 183 days. Hence your tax identity shall switch from resident individual to non-resident individual.
As the calculation for the two tax identities are different, it is possible to have tax owed. For resident individuals, IIT is calculated on accumulated salary and shall use the annual comprehensive tax rate. In general, resident individuals are subjected to lower tax rates at the first few months of the year and then subject to higher tax rates later in the year as accumulated salary mounts up. IIT for non-resident individuals is calculated on each month’s salary and shall use the monthly comprehensive income tax rate.
So, in the withholding stage, you were regarded as a resident individual and subjected to a lower tax rate at three percent. The total IIT payable was RMB 450. However, your IIT shall be recalculated based on the method for non-resident individuals, and you shall be subjected to a higher tax rate at 10 percent. So, the total IIT payable shall be RMB 870. Hence the tax owed of RMB 420 is attributed to the shift of tax identity.
| Month | Income (RMB) | IIT for non-resident individuals (RMB) | Tax rate | IIT for resident individuals (RMB) | Tax rate |
| January 2021 | 10,000 | 290 | 10% | 150 | 3% |
| February 2021 | 10,000 | 290 | 10% | 150 | 3% |
| March 2021 | 10,000 | 290 | 10% | 150 | 3% |
| In total | 30,000 | 870 | 10% | 450 | 3% |
Under these circumstances, you should report to the competent tax authority within the period from the day on which he/she fails to satisfy the resident individual criteria to 15 days from end of the year. Your IIT will be recalculated and all the tax owed has to be settled.
Q2. I am a foreigner. I worked for Company A (in China) in the first half of 2021 with monthly salary of RMB 10,000, and worked for Company B (in China) in the second half of 2021 with monthly salary of RMB 15,000. Is it possible that I have tax owed?
Companies serve as the withholding agents and will withhold tax monthly.
When you switched to Company B, Company B shall assume July 2021 as the starting month of your income. Without aggregating your income from Company A, your accumulated income was zero when Company B started calculating your IIT and you were subjected to a lower tax rate.
At the annual IIT reconciliation, your income from both Company A and Company B shall be combined for calculation, and you shall be subjected to higher tax rates and be required to pay tax owed. The calculation is demonstrated as below.
When Company A and Company B calculated separately, the withheld IIT in total was RMB 4,380:
| Monthly income (RMB) | Number of months | Total income (RMB) | Total deduction (RMB)* | Taxable income (RMB) | IIT | Tax rate | |
| Company A
(January to June 2021) |
10,000 | 6 | 60,000 | 30,000 | 30,000 | 900 | 3% |
| Company B
(July to December 2021) |
15,000 | 6 | 90,000 | 30,000 | 60,000 | 3,480 | 10% |
| In total | 60,000 | 90,000 | 4,380 |
*Here we only take into account the standard deduction, which is RMB 60,000 per year. In practice, it’s possible that there will be other kind of deductions, such as special deductions (the individual’s social insurance and housing fund contributions), the special additional deduction (children’s education, continuing education, serious illness medical treatment, housing loan interest or housing rent, expenses for elderly support, etc.), and the tax-exempt fringe benefits for foreigners.
After IIT reconciliation, the recalculated IIT payable is RMB 6,480:
|
Amount (RMB) |
|
| Company A taxable income | 30,000 |
| Company B taxable income | 60,000 |
| Total taxable income | 90,000 |
| IIT payable | 6,480 |
| Tax rate | 10% |
That is to say, the tax owed of RMB 2,100 needs to be paid.
Q3. I am a foreigner. I worked for Company A for 2021 and my monthly salary was RMB 20,000. I also provided labor service to Company B for the whole year and my monthly service fee was RMB 20,000. Is it possible that I have tax owed?
Yes, wages and salaries, labor remuneration, author’s remuneration, and royalties are declared separately in the withholding stage, but shall all be combined into comprehensive income in final IIT reconciliation. After combination, you might be subjected to a higher tax rate.
In the withholding stage, Company A withheld IIT for salary and Company B withheld IIT for labor service separately. The two companies withheld RMB 57,480 IIT in total.
|
IIT on Salary Income from Company A |
|
| Monthly income (RMB) | 20,000 |
| Total income (RMB) | 240,000 |
| Deduction (RMB) | 60,000 |
| Taxable income (RMB) | 180,000 |
| Total IIT withheld (RMB) | 19,080 |
| Tax rate | 20% |
|
Service Fee Withheld by Company B |
|
| Monthly service fee paid (RMB) | 20,000 |
| Deduction per month (RMB) | 4,000 |
| Taxable income per month (RMB) | 16,000
|
| IIT per month (RMB) | 3,200 |
| Total IIT for the service fee (RMB) | 38,400 |
| 20% |
In the annual IIT reconciliation, the taxpayer is taxed by aggregating both salary income and income from labor service on a yearly basis. Incomes are combined and subjected to a higher tax rate of 25 percent. For the whole year, the IIT payable is RMB 61,080.
You shall be required to pay tax owed of RMB 3,600.
| Amount | |
| Taxable income from labor service (RMB) | 16,000*12=192,000 |
| Taxable salary income (RMB) | 180,000 |
| Total Taxable comprehensive income (RMB) | 372,000 |
| IIT payable in total (RMB) | 61,080 |
| Tax rate | 25% |
Q4. What are the consequences if the tax owed is not paid within the time limit? If there was an overdue tax payment of the 2020 annual IIT reconciliation, will it affect my annual IIT settlement for 2021?
If the individual fails to complete the annual IIT reconciliation and payment on time (i.e., before June 30 every year, unless it is otherwise stipulated), the tax authority will send a reminder. Where the circumstances are serious, the individuals might be held accountable, and this will be documented on the individuals’ personal tax credit files.
Also, for individuals failing to settle their taxes owed in time, they will need to pay a late fee at the daily rate of 0.05% and may be subject to additional fines.
Such individuals are not eligible for the 2021 annual IIT reconciliation before they complete the 2020 annual IIT reconciliation and pay the tax owned.
Closing remarks
Annual IIT reconciliation is one of the most common topics of concern and confusion among individual taxpayers. Individual taxpayers are recommended to make the annual IIT settlement before the required deadline. For taxpayers who have tax owed, they are recommended to pay the tax owed in time according to relevant regulations, to avoid unnecessary late fee, fines, and the negative impact on their personal credit record.
About Us
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.
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