China's tax relief not clear enough to attract HK talent

China's tax exemption rules announced earlier this year in a bid to attract more foreign investment and overseas talent to work in the mainland may fail to lure Hong Kongers to “go north” because of unclear definitions of the terms in the rules.

From the beginning of 2019, a newly amended individual income tax (IIT) law in China took effect, under which foreign workers who stay in the mainland for 183 days or more for five consecutive years will be required to pay tax on their income derived from sources inside and outside the mainland according to China's tax regime.

In March, Beijing offered a more generous tax exemption for overseas workers in Mainland China, raising from five years to six years as well as a "not in China for more than 30 days" relief to avoid paying tax on worldwide income for non-Chinese residents.

Number of HK People working in China raised 0.6% from 2003 to 2017

The income tax rate in China can reach as high as 45 percent compared with about 17 percent in Hong Kong.

Overseas high-end talent and professionals who are "urgently needed" and work in the Greater Bay Area will be eligible for paying China's tax with Hong Kong tax regime, by getting subsidies from local governments to offset the differences between the two tax systems, China's Ministry of Finance announced in February. The authorities hope the tax relief will encourage Hong Kong talent to pursue their careers in the Bay Area.

Tax relief for HK People will be implemented to the nine cities in the Bay Area

Also, non-Chinese residents would not be subject to the new tax law on their worldwide income if they meet the “more than 30 days outside the mainland” requirement.

It has seen limitations and difficulties so far on definitions of terms and operation, hindered the incentive to work in China, even though Beijing provided a lenient tax exemption to Hong Kong People. Lawmaker Michael Tien Puk-sun said there is no standardized definition of “high-end and urgently needed talent,” so the definition may vary between cities and there are no selection criteria provided at this moment. The definitions are stipulated to define by the Guangdong Provincial Government and Shenzhen Government, according to the official announcement.

“People with professional and high academic qualifications in Hong Kong should be qualified to the tax exemption, allowing more Hong Kong people benefit from it,” Tien said.

Although tax break is provided, the difference between two tax regimes will only refund after Hong Kong People paid the China income tax.

Edwin Bin, the founder of Manage Your Tax, an expert in China tax policy, said the definitions of “high-end and urgently needed talent,” rules and regulations of the overpaid tax refund and the definitions of “non-Chinese resident” do not explain clearly in the tax article.

“We normally define Chinese resident as those who live and work in China with his/her family for a prolonged period in a sense that they no longer stay in Hong Kong. People may feel frustrated as there are no guidelines on this issue,” he said.

Andy Kong, an insurance consultant, works in Shenzhen 3 to 4 days a month. He worried about the high tax payment under China tax regime and falling into a “tax trap” unanticipatedly because of the vague definition of terms and the unacquainted with the tax calculation; he prefers to stay less than 183 days in the mainland.

“China tax regime is too complicated to understand, and it varied from time to time. I am afraid the tax exemption provided today will be modified the day after,” he said.

Bin said China individual income tax was charged under many different situations and it was so complicated that even tax advisors need time to understand the tax policy. He suggested the public consult with experts before working in the mainland to fully grasp the tax liability.

“Employers may need to adjust the salary such that the income can bear the high tax payment,” Bin added. “It is better to reach a compromise between employers and employees, which parties will bear the overpaid tax, before sending employees to the north.”

Personal income tax was charged at progressive rates, ranging from 3 percent on the first RMB 36,000 to 45 percent for exceeding RMB 960,000 (about $42,024 to $1,120,647) after deducting the basic allowance RMB 60,000 (about $70,040).

Salary tax is charged at progressive rates in Hong Kong as well, ranging from 2 percent on the first $5,000 to 17 percent for exceeding $200,000 after deducting the basic allowance $132,000.

Bin believed that the tax refund procedure would be easy and smooth as long as the Chinese government had a clear guideline mentioning the documents and processes needed for the tax refund.

There is Double Taxation Relief between Hong Kong and China

《The Young Financial Post 新報人財經》

新報人財經(TYFP)為香港浸會大學新聞系財經專業的實驗平台,由學生自主編採,為社會大眾提供中港相關的金融財經消息。

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