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Human Resources and Payroll in China 2016-2017 (5th Edition) -
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Tax planning via deductible allowance
[Example]
Mr. J is an expat who works for a foreign-invested enterprise in Shanghai. His employment income
of RMB 10,000 is fully taxable in China and his individual income tax is borne by himself. Suppose
he receives a housing allowance of RMB 3,000 in total and no other deductions. Below, we compare
his original income tax liability to an arrangement with deductible fringe benefits.
As can be seen, Mr. J was able to save 76 percent off of his tax liability by using a housing allowance,
at no extra cost to the employer.
One thing to be noted is how much of a foreign employee’s salary can be allocated to allowances.
This is something that is not clearly defined by law, which only stipulates that the allowances should
be “reasonable.”In practice, many companies adopt a proportion of 30 percent of the total salary of
the foreign employee and classify this portion as an allowance. There is always the possibility that
the tax office will challenge the company on this issue, so we recommend that the proportion of
allowance be set at or below this level.
Original Liability
Optimized with Deductions (RMB)
Total income
10,000
10,000
Deductions
4,800
4,800
0
3,000 (non-taxable allowance)
Taxable income
5,200
2,200
Tax rate
20%
10%
Quick deduction
555
105
Tax payable
485
115
Tax saving
370