China to Collect IIT on Tax Borne by Employers on Behalf of Employees on Annual Lump-Sum Bonuses

The China State Administration of Taxation (SAT) issued the Circular regarding the Calculation of Individual Income Tax on the Portion of Tax Borne by Employers on behalf of Employees on Annual Lump-Sum Bonus (“Circular”) on April 28, 2011. 

According to the Circular, where the employer bears a portion of the individual income tax levied on the annual lump-sum bonus received by an employee, it shall be deemed as an increase in the employee’s income.  Such portion should be added to the amount of the employee’s annual lump-sum bonus and then converted into taxable income, based on which individual income tax should be levied.

The Circular stipulates the formulae for converting tax-exclusive annual lump-sum bonus into taxable income.  The formula where the employer bears a fixed sum of tax on behalf of the employee is as follows:

Taxable income = Annual lump-sum bonus received by the employer + fixed sum of tax borne by the employer on behalf of the employee – difference between the monthly salary and the deduction standard where the former is less than the latter.

After calculating the taxable income, the taxable income should be divided by 12 in order to find out the corresponding applicable tax rate and quick deduction figure based on the quotient.  After that, the tax amount payable can be calculated using the formula below:

Tax amount payable = Taxable income x applicable rate – quick deduction figure

Actual tax to be paid = Tax amount payable – tax borne by the employer on behalf of the employee

The Circular further provides that the individual income tax borne by the employer on behalf of the employee should be deemed as a part of the employee’s salary.  Where it is independently itemized as the enterprise’s administration fee, it cannot be deducted pre-tax before calculation of its Enterprise Income Tax.

The Circular came into effect on May 1, 2011.

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