China New Tax Law

[Spawnboy99]

Can someone with hands-on experience be able to explain to people that haven't worked in China before what this new tax law means for Expats and how does this affect salaries and the total package that a school will normally offer you and your family?

[base5555]

Well it is hard to say since it hasn't been put into effect yet. However looking at the language of the law, the most significant impacts are taxing your kids tuition as salary, and also your housing and travel bonus. So currently I pay around 20% taxes, so I can expect to pay at least that on these benefits even though I don't really receive them as salary. However, I expect my tax rate will increase even further. Bottom line: If my school isnt able to maintain my net pay after taxes, I am GONE! The current exchange rate is also lowering our salaries (since contracts are written in dollars), and this additional tax would be the nail in the coffin. Why stay in a restrictive country, unable to visit family with an ever decreasing salary all while cost of living is greatly increasing. Anyways, this is my two cents.

[inchinanow]

No expats know what is going to happen in January, the only official sources of information are the government websites.

Any other rumors are just speculation unless its posted by the national government on their website. These changes where posted three years ago so not a sudden change overnight. The changes where implemented to make it easier for Chinese nationals to take well paid and responsible jobs from what appears to be an "only employing foreigners" situation.

I don't see the Chinese government changing or delaying the full implementation of the tax regulations just because some foreigners may be out of pocket.

The only confirmation that something is going to happen are changes to your income details on your individual tax app. This is in the form of none taxable income of children's tuition fees been added to your gross income. So I know someone with two kids at a rent-a-name school have 700k rmb added to their income. Apparently the tax department do know how much tuition a school charges and have added that to a teachers earnings,as yet markef untaxed.

No details on how this will be taxed. Will the tax bureau simply add up everything as one income stream and deduct tax according to regulations, this woul mean some teachers moving into the 45% tax band and therefore be subject to a 100% reduction in earnings! The tuition fees in total are greater than the money earnings of the teacher.

So the two biggest tax loopholes that seem to be going are tuition fees and housing allowances. We can still look forward to a tax free flight allowance, but we cant leave the country at the moment!

[PsyGuy]

It means:

- Your housing allowance is now taxed as regular income/salary.
- The value of your school age children's tuition/fee, waiver/place is for all practical purposes now taxed as regular income.
- The inclusion of the tuition/fee, waiver/place is very likely to move the IT into a higher tax bracket with a higher percentage tax rate. With the difference in tuition/fee costs and salary its possible some ITs will make very little or actually end up owing more than they make.
- There are going to be some ISs that will absorb the tax as part of the compensation, but this benefit will just increase the tax more.

This means,
- China isnt going to be an attractive location for ITs with school age children.

Its not going to make China's IE any more local Chinese heavy. Tiger mom and dad arent going to pay those fees/tuition for the same local Chinese face they could see in their public/maintained DS. All its really going to do is make China a singles or teaching couples with no kids destination. This will decrease the competitiveness for jobs in China and likely reduce the standards in lower tier ISs as those ISs struggle increases to fill vacancies. More ISs will have to fill IT vacancies with ETs.

Paying tax on housing benefits will be an annoyance but not a deal breaker, and a larger portion of ISs will possibly absorb the tax cost as part of the benefit with other ISs just shrugging it off as part of the benefit. Your housing allowance of X will buy the IT less housing as they have to absorb the tax on it as part of the housing benefit (I.E. your IS gives you RMB¥5000/mth housing allowance but its taxed at 20% costing you RMB¥1000/mth, means you only have RMB¥4000/mth to spend on your housing. Some ISs will compensate for this by increasing the housing allowance to RMB¥6000).

[inchinanow]

In Shanghai some schools offer 12 - 15000rmb a month housing allowance, the implications of having that added to your taxable earnings is disastrous. Not only will the teacher pay additional tax on this amount but it will place the teacher into a higher tax bracket, so they could end up pay 30 - 35% tax on ALL their income.

If school tuition fees are included this may push teachers into the 60% super tax band!

[PsyGuy]

@inchinanow

Those ITs will just have to find housing for RMB¥8000-10000 with having to pay tax on the housing allowance. More ISs will probably mandate or provide housing accommodation directly and try to get around it as a business expense or make the value ridiculously cheap no that the tax is trivial.

Tuition/fees is to be a taxed benefit. That wont happen though, ITs with school age kids just wont take jobs in China.
Tuition/fees at some of those ISs are more than the ITs salary and paying 30%-35% will leave the IT with a pittance and at 60% those ITs will make nothing and actually owe. Imagine going to payroll and instead of collecting your salary you have to pay them out of your savings. RMB¥700K tuition per child per year, 2 kids is RMB¥1.4M. Two tuition/fee, waivers/places suggests both parents are ITs figure each of them makes RMB¥500K salary thats RMB¥1M in income. Thats RMB¥2.4M of taxable income at a 60% tax rate thats RMB¥1.44M in tax, which exceeds the income of the ITs. They work for nothing and have to pay the IS about RMB¥37000/mth. No one will do that. Even with one kid, at a 35% tax rate the tax on income and the tuition/ fee benefit is RMB¥595K thats one whole IT parents salary and 20% of the other IT parents salary.
ITs wont go to China for that. China will become a no kids IE destination.

[Heliotrope]

inchinanow wrote:
> In Shanghai some schools offer 12 - 15000rmb a month housing allowance, the
> implications of having that added to your taxable earnings is disastrous.
> Not only will the teacher pay additional tax on this amount but it will
> place the teacher into a higher tax bracket, so they could end up pay 30 -
> 35% tax on ALL their income.
>
> If school tuition fees are included this may push teachers into the 60%
> super tax band!


I'm not sure if China does the same, but usually you only pay the higher percentage over the part of your income that actually puts you in that higher tax bracket.

For example, suppose there are tax brackets of 10%, 20%, and 30%.
The 10% rate applies to income from $1 to $10,000, the 20% rate only applies to income from $10,001 to $20,000, and the 30% rate only applies to all income above $20,000.

So if your salary gets raised from $10,000 to $20,000 this does put you into the 20% bracket, but the tax on that $20,000 of income is 10% of the first $10,000 + 20% of the second $10,000 = $1,000+$2,000=$3,000.

So even though the raise in income from 10,000 to 20,000 puts you in the 20% bracket, that 20% only applies to the extra money you're making above the first 10,000 of your income, so not to ALL of your income.

[Psychometrika]

China does have a progressive tax system so tax on the original salary won’t change and will stay at an average ~20% tax rate or so. However, the housing and tuition benefits as additional income will (probably) be taxed at the marginal rate so you are looking at 40%+ on those. Probably a deal breaker for those with children, but housing should be fine if schools up the benefit so you get the same after taxes. Even if the schools make the teacher eat the cost on housing paying ~40% on that should be manageable if the base salary is decent.

Even putting that aside though with the difficulties getting into China, never being able to leave for a vacation or see family, increasingly nationalistic education policies, and an uncertain business climate all make China a dicey proposition right now. Money was the big draw for many teachers and these new taxes certainly do not help.

[inchinanow]

I have to visit the Shanghai tax office next week to get some documents printed, so I will wonder round to the tax information desk and ask if anybody knows what will happen 1st January.

[Asteger]

Good idea to get positions at the rare schools who can: guarantee net salary, pay tax on other payments, provide school-owned housing or pay tax on the housing allowances they offer. Otherwise, perhaps wait and see what will happen in the new year.

At any rate, if you work here currently you are basically stuck here for the time being. Too expensive or risky to travel abroad. Plus, as before covid, you always also have the restrictions related to what you read, say, teach, do, watch, think, etc. Yet, you have covid safety here, which is good. And it's a big enough place if there is no flare up or local restrictions. Lots lots of room to explore. Increased good job opportunities, as well.

[PsyGuy]

The upcoming issue is going to be which ISs are going to absorb the hefty tax cost on tuition waivers/places? Otherwise, China just becomes a no dependents IT destination.

[inchinanow]

During my visit to the tax office the friendly official basically said the rent, flight and tuition fees will be taxable at 25%.

If will be impossible for schools to absorb the taxation on the higher tuition fees of 300-400k as it is individual teachers responsible for paying their own tax liabilities. If a school absorbed the tax on tuition fees it would simply mean more taxable income for the teachers. I am also sure schools are currently offsetting tax against the free tuition fees they are currently offering staff with dependents in the school. A school will claim a free school place offered to a teachers child is a lose in revenue and claim it back as a legitimate business loss.

No such thing as a free lunch when the taxman is involved.

[Asteger]

PsyGuy wrote:
> The upcoming issue is going to be which ISs are going to absorb the hefty
> tax cost on tuition waivers/places? Otherwise, China just becomes a no
> dependents IT destination.

Yup, as I wrote above about tax. As for dependents, current policies on this depend on where you are in CN. Until recently I think BJ and SH were no-dependents places, where I am this has not been an issue. However, I think in the past week Beijing at least has begun to support visas for dependants too.

inchinanow wrote:
> During my visit to the tax office the friendly official basically said the
> rent, flight and tuition fees will be taxable at 25%.
>
> If will be impossible for schools to absorb the taxation on the higher
> tuition fees of 300-400k as it is individual teachers responsible for
> paying their own tax liabilities. If a school absorbed the tax on tuition
> fees it would simply mean more taxable income for the teachers. I am also
> sure schools are currently offsetting tax against the free tuition fees
> they are currently offering staff with dependents in the school. A school
> will claim a free school place offered to a teachers child is a lose in
> revenue and claim it back as a legitimate business loss.
>
> No such thing as a free lunch when the taxman is involved.

Not completely clear on your comments, but agree that schools will be scheming to an extent.

[phoenixandox]

This is going to be a long and detailed post. Over the last few months there have been many vague comments on this site, but few specific details with clear numbers. All monetary amounts below are in RMB. I am going to go through calculations for 3 different scenarios below based on the example of a teacher who currently receives:
a) After tax cash salary of 12mth x 26,410 = 316,920 per year
b) Housing allowance of 12mth x 10,000 = 120,000 per year
c) One child's school place free tuition = 200,000 per year

For simplicity I am ignoring any other smaller allowances. Under the new tax rules effective from 1st Jan 2022:
a) Cash salary has always been taxable and will continue to be.
b) The tax free housing allowance for foreigners ends. They instead become eligible for a tax free rental deduction of 1,500/mth (the same as local employees)
c) The tax free tuition fee for foreigners ends. They instead become eligible for a tax free education deduction of 1,000/mth (the same as local employees)


Scenario 1 - Under current tax rules in 2021

Gross salary before tax = 12mth x 30,000 = 360,000 (taxable)
Housing allowance = 12mth x 10,000 = 120,000 (non-taxable)
Tuition allowance = 200,000 (non-taxable)

Taxable income = 360,000
Standard tax free allowance = 12mth x 5,000 = 60,000
Tax basis = 300,000

Tax payable calculated across the different tax rate bands
(300,000 - 144,000) x 20% = 31,200
(144,000 - 36,000) x 10% = 10,800
(36,000 - 0) x 3% = 1,080
Total tax payable = 43,080

Therefore net cash salary after tax = 360,000 - 43,080 = 316,920/year = 26,410/mth
Total package received by teacher = 316,920 cash + 120,000 housing + 200,000 tuition = 636,920
Total cost to the school = 360,000 gross salary + 120,000 housing + 200,000 tuition = 680,000


Scenario 2 - Under new tax rules in 2022, the teacher bears the full cost

Gross salary before tax = 12mth x 30,000 = 360,000 (taxable)
Housing allowance = 12mth x 10,000 = 120,000 (taxable)
Tuition allowance = 200,000 (taxable)

Taxable income = 680,000
Standard tax free allowance = 12mth x 5,000 = 60,000
New tax free rental deduction = 12mth x 1,500 = 18,000
New tax free education deduction = 12mth x 1,000 = 12,000
Tax basis = 590,000

Tax payable calculated across the different tax rate bands
(590,000 - 420,000) x 30% = 51,000
(420,000 - 300,000) x 25% = 30,000
(300,000 - 144,000) x 20% = 31,200
(144,000 - 36,000) x 10% = 10,800
(36,000 - 0) x 3% = 1,080
Total tax payable = 124,080

Therefore net cash salary after tax = 360,000 - 124,080 = 235,920/year = 19,660/mth
Total package received by teacher = 235,920 cash + 120,000 housing + 200,000 tuition = 555,920
Total cost to the school = 360,000 gross salary + 120,000 housing + 200,000 tuition = 680,000

==> The teacher's total package has reduced by 12.7%. Housing and tuition are unchanged, but there is a 25.6% decrease in the net cash received.
==> The overall cost to the school is unchanged


Scenario 3 - Under new tax rules in 2022, the school bears the full cost

Gross salary before tax = 12mth x 39,936 = 479,231 (taxable)
Housing allowance = 12mth x 10,000 = 120,000 (taxable)
Tuition allowance = 200,000 (taxable)

Taxable income = 799,231
Standard tax free allowance = 12mth x 5,000 = 60,000
New tax free rental deduction = 12mth x 1,500 = 18,000
New tax free education deduction = 12mth x 1,000 = 12,000
Tax basis = 709,231

Tax payable calculated across the different tax rate bands
(709,231 - 660,000) x 35% = 17,231
(660,000 - 420,000) x 30% = 72,000
(420,000 - 300,000) x 25% = 30,000
(300,000 - 144,000) x 20% = 31,200
(144,000 - 36,000) x 10% = 10,800
(36,000 - 0) x 3% = 1,080
Total tax payable = 162,311

Therefore net cash salary after tax = 479,231 - 162,311 = 316,920/year = 26,410/mth
Total package received by teacher = 316,920 cash + 120,000 housing + 200,000 tuition = 636,920
Total cost to the school = 479,231 gross salary + 120,000 housing + 200,000 tuition = 799,231

==> The teacher's total package and net cash received is unchanged.
==> The overall cost to the school has increased by 17.5%


Summary

The above calculations are just for general guidance. Each person's specific situation will obviously vary depending on actual salary, actual housing allowance, actual tuition fee, number of children, etc.
Some schools have said they will cover the entire cost of the changes for at least the next one or two years, which is clearly a major effect on their overall running costs. Presumably some other schools will try to share the cost part each between the school and the teacher.

[inchinanow]

At the moment the teacher in the last post gets a good deal. A combination of salary, housing and tuition fees add up to 680k rmb and only 75k rmb tax is payable.

Under the new regulations as written and this is in my opinion the worst possible outcome, the same 680k gross income will result in 200k tax payable.

Since the teacher only is paid 360k CASH in their contract, this result in a yearly take home pay of 155k rmb or approximately 12750rmb/month after the full taxation is deducted. I just ran all the figures into a spread sheet and used the regulations as I understand them over many years.

680k - 56k/month
7500rmb tax free
49k taxable at 35%

17k tax/month - 200k rmb tax/year

360k rmb cash - 200k rmb rax = 160k/year

or about 13k cash into the bank/month!

If you 2 or more kids in a school, you could be liable to pay more tax then you earn as the tuition fees exceed your cash salary. Some schools advertise 350k plus a year tuition fees.

The schools can not bear full tax burden as this would again be a taxable payment. Schools may be able to offer a pay rise but that again will be taxable.