IIT (Individual Income Tax) Planning for Expatriates in China

‘What is the law regarding the taxation on income of expats in China?’ ‘How is IIT of expats declared in Shanghai?’

‘How to calculate my IIT to avoid repeated levy by my own country?’

-These questions are usually asked by my clients,and Legal tax avoidance is a forever hot topic.

China’s individual income tax [IIT] rate, from 5% to 45%, is in the upper level of the world. Due to the high costs and complex rules, you do have the demand and opportunity to save your individual income tax in a legal and proper way. An anticipatory and skillful tax plan can help!

-Am I liable to pay individual income tax?

Identification determines your tax liabilities. It is not always high earners who pay the highest marginal rates of taxes on income. There are different tax rules, rates, and exemptions for different people. Even for persons who stay in China with same purpose, that is, with same kind of visa, different tax treatment may occur due to different certificates they hold.

Example of Practice: a man was recruited by a Chinese University as an English Teacher, this person can get Expert License (Culture & Education), with which he apply for the working visa and resident permit. Compared with those who hired by company, like WFOE, JV, or RO, even they have the same purpose to WORK here with the same kind of “Z” visa, the second person cannot be treated tax free for his oversea income due to the lack of ‘Expert License’.

-Can I save tax by controlling the days spent in China?

Good controls of resident days help avoid huge tax burden. Under China Tax Treaty, different exemptions apply to different accumulative days of presence in the PRC in a calendar year. Less than 90/183 physical days, over 90/183 days but not exceed one year, and even one year to five, can enjoy tax benefits respectively.

Technical tips: Avoid being taxed on worldwide income by breaking the 5 year chain. Leaving China for 31 days consecutively or 91 days cumulatively by the 5th year will help. Furthermore, leaving China for 31 days consecutively or 91 days cumulatively in the 6th year help you restart the 5 year clock.

-Which kinds of income are taxable?

Rearrange the nature of your income to make full use of the exempted categories. Temporarily exempted expenses include the house allowances, meal allowances, removal compensation, laundry allowance obtained for foreigners in non-cash form or in reimbursement, the relative visit allowance, language training allowance, children education allowance and the dividends and bonus obtained from FIEs.

Technical tips: Never getting cash income to pay your personal living expenses. Reimbursements upon actual figures help you to maximize the exempted expenses. Pay living expenses after the receipt of cash income bring loss to you compared with submitting the actual invoices to employer and get the net amount.

-International Tax Planning with Tax Protection & Equalization Policies.

Due to the worldwide different tax rates, in order to ensure that the expatriate assignment is “tax neutral”, many companies pay taxes that exceed the expatriate’s hypothetical tax liability. Companies also implement tax equalization policies so that expatriate employees are treated fairly and consistently throughout the world.

Example of Practice: an UK expatriate in China is treated the same as work in his home town and in US although the tax laws in these countries are vastly different. After the deduction of his oversea hypo tax, the person enjoys the less tax benefits, or the employer affords the extra cost during his stay in China

What Is Income Tax Planning?

There are many things in life we try to plan for. We try to plan home and car purchases, the future of our children, and our retirement. Not many people plan their income taxes because they do not know anything about it. What is income tax planning? Why is it important?

The most important part of tax planning is to minimize your taxes. Income tax planning involves determining which tax laws apply to you. Every person has a different income situation that will fall under certain laws. To make sure you are reducing your tax liability, you need to create a tax plan, which can be done in three different ways.

The first way of creating income tax plans is through your adjusted gross income. The AGI is the result of subtracting and adding certain aspects to your income. Things like investments are added to your wages, while things like mortgage payments subtract from your wages. Higher AGI totals mean a greater tax liability. If you want to reduce your tax liability through your adjusted gross income, start a retirement plan like a 410k. When you add money to this plan, your income is reduced, which in turn lowers your tax liability.

A second way to reduce your taxes through a tax plan is through deductions. Most people assume that tax deductions are only for business owners. Itemizing your deductions is helpful. Many people can deduct things like health care expenses, car registration fees, the interest on your mortgage, and charitable gifts.

Tax credits are a third aid in your income tax planning. There are many different kinds of tax credits, and you won’t be eligible for all of them. Even a few, however, can help reduce the tax amount you would owe. There are college tax credits, credits for certain home renovations, and for adopting children. Most common is the earned income credit. Utilizing the credits that are available to you can help reduce how much taxes you will owe.

You can also reduce the amount of taxes you would owe by raising the withholding amount from your wages. Many people with dependents think it is better to claim zero dependents on W-2 forms because they get more of their paychecks. Actually, by increasing the amount that is taken out of your pay, you get a bigger refund on your income tax.

It is important to always keep receipts. You never know what can be claimed as a deduction. Purchases for home improvements, gas expenses, and anything related to your job could qualify. If your itemized deductions are greater than the standard deduction, you can choose them but you can use both types of deductions.

When people hear the question what is income tax planning, they often think it is just about filing your taxes properly, but it is more than that. It is about what you do before it is income tax time, throughout the remainder of the year. It is about making sure that you have everything set up so that you are making sure that you are doing everything that you can to lower how much taxes you will be responsible for.