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Chief Representative Taxation in China
Scenario
Mr. A, the chief representative of the USCorp Shanghai Representative
Office. Mr. A is based in the United States of America but
is required to make regular trips to Shanghai. As such, he
is liable to pay Individual Income Tax in the People's Republic
of China from the time he assumed the chief representative
position. Every month, he must declare his income and pay
PRC income tax, as from the start of his appointment. Mr.
A's tax liability is determined by apportioning his total
wages and salary according to the amount of time he spends
inside and outside China in any given month.
Calculating the Amount of Income Tax
The basis for calculating Mr. A’s monthly income tax
is as follows:
(Total Salary for the Month x # of Days Spent in China) ¡Â#
of Days in the Month
When calculating the number of days he spends in China, Mr.
A should include the day on which he enters the country, but
exclude the day on which he leaves. Any days spent outside
China for personal reasons should be treated as if he remains
in China. Mr. A's employment letter should include a term
stipulating his duties and responsibilities out of China in
order to support his claim for apportioning the time spent
outside China. This will help avoid the tax authorities claiming
that all the time outside China is for personal reasons.
To help in Mr. A's tax planning, the following is a brief
summary of the PRC treatment of individual income tax.
Scope of Wages and Salaries
Pursuant to PRC tax laws and regulations, wages and salaries
include cash awards, bonuses, allowances, subsidies, bonus,
and other compensations received by Mr. A during the course
of his employment. However, Mr. A should check with his legal
advisers on the taxability of other compensation items as
a number of items are "temporarily exempted from individual
income tax" pursuant to tax notices issued by the SAT.
Mr. A heard that his Chinese language training expenses, paid
home leave, and generous medical benefits are temporarily
exempted from individual income tax.
In any event, Mr. A has been told that for any non-taxable
items, he should provide valid evidence of the amounts incurred
(which should be reasonable), for example, invoices or receipts.
Tax Rates
The Individual Income Tax rate will vary on a sliding scale,
ranging from 5 to 45 percent, according to the amount of Mr.
A's taxable monthly income.
The Individual Income Tax Law provides that foreign personnel
with PRC-sourced income may receive extra deductions based
on their average income level, their standard of living, and
exchange rate changes, as determined by the State Council.
Calculating the Amount of Monthly Payments
The formula for calculating the amount of tax Mr. A is required
to pay is as follows:
(Amount of Taxable Wage and Salary Income for the Month x
Applicable Tax Rate ¨C Amount of Quick Calculation Deduction)
x (# Days Inside China During Month ¡Â# Days in
Month)
Withholding Tax
Any PRC unit or individual that pays income to Mr. A on which
individual income tax is payable must act as a withholding
agent. If a withholding agent fails to withhold or collect
tax from Mr. A as required, the withholding agent is liable
for the tax that should have been withheld or collected, as
well as corresponding interest, penalties and/or surcharges.
For these purposes, a representative office is a withholding
agent, and has to withhold Mr. A's income regardless of whether
it is paid in China or is paid offshore.
Payment of Individual Income Tax
The amount of Mr. A’s monthly tax liability will generally
be deducted from the bank account designated for payment of
taxes of the RO by the competent tax authority. The tax liability
could also be settled by payment of cash, bank transfer or
check to the tax authority directly.
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