Proposed changes to China’s taxation system which will make it easier to tax foreign employees’ offshore income have alarmed Australian businesses operating in the world’s second-largest economy. They warn the reforms will make it harder to attract talented executives to the country.
Under new personal income tax laws, Australians and other foreigners working in China for more than six months of the year could have to pay tax on offshore earnings such as rental income and investments.
The proposed new rules are part of a wider revamp of China’s taxation system to bring the country’s regulations in line with international standards. They remove tax breaks for expatriates introduced decades ago when the country was desperate for foreign talent as the economy opened up.
“In the past China had an open door policy. China wanted to encourage people to come and work here. Now they are starting to align these things back to international standards,” Stephanie Liu, a partner at Azure Group, which advises Australian firms in China, said.
“If everyone is on the same tax system, that will encourage companies to hire more local staff. It has been very easy for foreigners to have a tax advantage in China.”
Some Australian business executives in China fear the changes are part of a more political strategy to make life more difficult for foreign companies, with the ruling Communist Party seen favouring local firms. This idea has gained credibility as US trade tariffs fuel anti-American sentiment. They say the changes will make it harder to recruit talent from Australia and elsewhere, while existing workers would leave.
Australian companies have ranked lack of transparency around sudden changes in the country’s regulations as one of the key challenges of doing business in China. The change in taxation rules appear to be no exception.
Under the changes, individuals who live in China for 183 days, or six months, a year will be classified as a resident for taxation purposes – which is standard in many western countries. This compares with 365 days currently in China, which made it easy for expatriates to “break” their residency status by leaving the country for 30 days.
What is not clear is an existing “five-year rule”, which exempts foreigners from paying tax on foreign income during their first five years living in China, will remain in place after January 1, 2019. Tax experts believe that exemption will be abolished.
While supporters say the changes are overdue, because it subjects foreigners to the same rules as locals in China, they clash with recent policy announcements from Beijing designed to attract more foreign talent to China. Beijing has introduced some tax breaks for foreign companies, such as waiving a 10 per cent impost on profits from equity investments.
China now shares tax information with other countries, including Australia, after adopting Common Reporting Standards (CRS) designed to combat tax evasion. Foreigners working in China also receive a tax-free allowance covering education, housing and some benefits. It is also unclear whether that will be removed or not, tax experts said.
China, under pressure to keep the economy stable as US trade tariffs hurt exports, also announced the country’s first income tax cut for all its citizens in years last month. It proposed raising the income tax threshold to 5000 yuan ($1000) a month from 3500 currently.
However, business in China wants larger tax cuts to remain competitive after US President Donald Trump slashed the corporate tax rate in December.
Tax rates on salaries in China range from 3 per cent to 45 per cent.