China’s New Individual Income Tax Changes to Have Universal Impact

The Standing Committee of the National People’s Congress has just passed new revisions to China’s Individual Income Tax (IIT) Law during its 21st meeting today. The final revisions increased the amount of deductible income for Chinese nationals to RMB3,500, while it was reported in the NCP’s last two proposals submitted for IIT reform that the IIT exemption threshold would only be lifted to RMB3,000.

The detailed revisions made to the IIT Law are as follows:

• IIT on income from salaries is subject to progressive tax rates, which range from 3 percent to 45 percent
• For Chinese nationals, the amount of taxable income from salaries equals the amount that is left after deducting RMB3,500 from one’s monthly salary

The NPC also agreed to reduce IIT tax rate levels from nine to seven, as suggested in the last two proposals. Additionally, the IIT filing period extends from 7 days to 15 days in the following month. The revised tax rates can be seen in the table below:

The revised IIT Law will take effect on September 1, 2011.

Currently, the lowest tax rate stands at 5 percent, and the IIT exemption threshold for Chinese nationals is RMB2,000. Foreigners are subject to the updated tax rates when the revised IIT Law takes effect in September, but the exemption threshold for foreigners remains RMB4,800.

Below is a comparison of the IIT levels for Chinese nationals under both the old IIT Law and the new IIT Law for various income levels. As the table shows, Chinese nationals whose gross monthly income is below RMB38,600 will begin paying less taxes when the measures come into effect September 1, while individuals with gross monthly incomes above 38,600 will start paying higher taxes. Under the new IIT Law, individuals whose gross monthly income falls between RMB8,000 and RMB12,000 will receive a maximum tax cut of RMB480, and individuals whose gross monthly income is above RMB110,000 will see the largest increase in taxes of RMB1,195. For foreigners, this would differ slightly since the IIT exemption threshold is now RMB3,500 for Chinese nationals and is RMB4,800 for foreigners.

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