China Annual Individual Income Tax Reconciliation – Tax Refund FAQs
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 commonly. To help taxpayers smoothly report their IIT status and make the annual IIT reconciliation, we will publish a series of articles to answer some of the most frequently asked questions that we have come across in our daily consultations with clients. This article will try to cover questions on tax refunds. Follow us to make sure you won’t miss our next Q&A on tax credits.
Q1. I am a foreigner working in China. Do I need to do annual IIT reconciliation or are only Chinese citizens required to do so?
Annual IIT reconciliation is a process applied to individual taxpayers on their comprehensive income (an individual’s combined income of wages and salaries, remuneration from labor services, author’s remuneration, and royalties), to make sure their IIT paid in the previous tax year is accurate.
Under China’s tax laws and regulations, individuals who stay in China for 183 days or more during a calendar year are regarded as resident taxpayers and should complete the annual IIT reconciliation process during the period of March 1 to June 30, regardless of being Chinese or foreigners.
To be more detailed, the annual IIT reconciliation applies specifically to resident taxpayers in the following scenarios:
- Taxpayers deriving comprehensive income from two or more sources, and the balance after deducting special deductions (that is, mandatory social insurances and housing fund) from the amount of annual comprehensive income exceeds RMB 60,000 (US$8,962);
- Taxpayers deriving one or more items of comprehensive income from labor services, author’s remuneration or royalties, and the balance after deducting special deductions from the amount of annual comprehensive income exceeds RMB 60,000 (US$8,962);
- Taxpayers who paid an amount in advance within a tax year that is less than the tax payable amount; and
- Taxpayer has applied for a tax refund.
To be noted, in practice, the annual IIT declaration process is called “reconciliation” sometimes. Foreigners will also need to pay attention to this process if they fall under one of the following circumstances:
- Taxpayer derives income from two or more sources, changes company, or takes an employment gap during the tax year.
- Taxpayer obtained varies type of income (for example get both wages and salary, labor services, royalties in a tax year).
- Taxpayer obtains taxable income but there is no withholding agent, or the withholding agent does not withhold tax or does not withhold the tax correctly.
- Taxpayer obtains overseas income.
Q2: I am from the United States. The head office (in the US) has sent me to work in China. I originally planned to work only for three months but ended staying in China for the whole year. Will this situation affect my IIT? The salary is paid by the Chinese branch, will there be a possibility of a tax refund? (Monthly salary in the first half year is RMB 10,000 and was raised to RMB 20,000 in the second half of the year).
For foreigners, “numbers of days staying in China” will affect the tax identity (tax residents vs non-tax resident), IIT calculation, and declaration. If you stay in China for more than 183 days, you will be regarded as a Chinese tax resident and your tax identity will therefore be changed from a non-tax resident to tax resident. As the calculation for the two tax identities are different in China, it may be possible for you to get a tax refund.
IIT for non-tax residents is calculated based on each month’s salary and adopts the monthly comprehensive income tax rate. For tax residents, IIT is calculated on accumulated salary and adopts the annual comprehensive tax rate. As the IIT is based on accumulated salary, tax residents will be subject to a lower tax rate at the start and then be liable for higher tax rates as salary accrues by month.
According to your situation, under the tax resident declaration method, you will be subject to a lower tax rate on the whole year basis and will be eligible for a tax refund of RMB 1,800. The annual IIT for non-tax residents will therefore be RMB 11,280 (at the comprehensive tax rate of 15 percent) while the annual IIT for tax residents will be is RMB 9,480 (at the comprehensive tax rate of 7 percent).
|Month||Income||IIT-non-tax resident||Tax rate||IIT-tax resident||Tax rate|
Q3. I am a foreigner. I began to work in China in March 2021, but I haven’t worked throughout the entire duration of the year. My monthly salary is RMB 10,000. Will this situation affect my IIT? Is there any possibility for a refund?
IIT is levied on taxable income, which is the income earned minus deductions allowed. The basic deduction allowed for taxpayer is RMB 5,000 per month, which is RMB 60,000 for a year.
Incomplete working period throughout the year may lead to inadequate deductions, which in turn leads to increased taxable income and overpayment of taxes.
Say that you have worked in China for 10 months, in the pre-declaration you would then only deduct 10 months basic deduction, which comes to for 10×5,000=50,000. However, the basic deduction for the whole year is 60,000, as an additional RMB 10,000 in income is taxed. Through annual IIT reconciliation, you can get a tax refund of RMB 1,000.
- Pre-declaration = (100,000-50,000) × 10% – 2,520 = 2,480
- Annual reconciliation = (100,000-60,000) × 10% – 2,520 = 1,480
Individual income tax = (income – deduction) × tax rate – quick deduction
In addition to the basic deduction of RMB 60,000, various types of expenses can also be deducted. These include social insurances, housing funds, children’s educational fees, further education, medical treatment for serious illness, housing loan interest or rent, expenses for elderly support, and more. If these expenses are not deducted, it is likely you can get a tax refund.
Q4. I offered patent rights (of a piece of software) to a company, and they paid me a one-year royalty fee of RMB 100,000 and a one-time consulting fee on the software usage of RMB 10,000. Besides that, my salary was RMB 360,000 in 2021. Do the royalty and consultation payments also need to be declared in the annual IIT reconciliation?
Yes, wages, salaries, labor remuneration (including consultation service fees), author’s remuneration, and royalties must all be combined to calculate the final IIT payable for the whole year. For your case:
The company withheld RMB 69,680 in IIT. Each type of income is calculated separately and taxed at a different rate.
|Income||Deduction||Taxable income||IIT||Tax rate|
For the whole year, the IIT payable is RMB 65,080. Incomes are combined and subject to a lower tax rate.
|Taxable comprehensive income||80,000||Royalty|
Through the annual IIT reconciliation, you can get refund of RMB 4,600.
Q5. If I am eligible for a tax refund, how will it be refunded to me?
Taxpayers can get tax refunds through the IIT app (个人所得税 app).
Individuals are required to fill in correct bank card information at the time of declaration. The bank card added for tax refund formalities must be a Chinese bank account, and we recommend taxpayers use Type I accounts (Type I accounts are full-function bank settlement accounts and bank cards with functions such as deposits and withdrawal, money transfers, payments, cash withdrawals, and so on). The bank account should preferably be one that you can use on a regular basis to ensure that it can accept transfers. The tax refund will then be deposited into the account upon examination and approval by the tax authorities, which takes approximately four to seven days.
It should be noted that the tax authorities will never ask taxpayers to provide bank account details or other relevant information through text messages, phone calls, or unofficial apps. Be aware of any requests for information of this kind as scammers have been known to pretend to be government officials to gain access to personal information and bank details.
IIT subsidies in GBA
If you have encountered a situation similar to the ones described above, you can try submitting annual IIT reconciliation and applying for tax refund. Besides IIT refunds, after having submitted the annual IIT reconciliation, foreign taxpayers working in the Hong-Kong-Macao-Guangdong Greater Bay Area (GBA) may also be eligible for IIT subsidies. In previous years, the IIT subsidy was launched one or two months after the annual IIT tax reconciliation closes.
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 firstname.lastname@example.org.
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