The State Administration of Taxation (“SAT”) .of the People’s Republic of China (“PRC”) issued Notice on the Matters regarding Individual Income Tax with respect to the Implementation of the Tax Arrangements between the Mainland China and Hong Kong (and Macao) (hereinafter referred to as the “Notice”) on April 26th, 2012, which addresses the double taxation problems in favor of the Hong Kong (and Macao) tax residents. The Notice takes effect from June 1st, 2012 (“Effective Date”) and applies to the income obtained after the Effective Date.
The key points of the Notice are as follows:
1. Scope of Application
The Notice is only applicable to those Hong Kong (and Macao) tax residents who are employed by a Hong Kong (or Macao) company or who are concurrently employed by both a Hong Kong (or Macao) company and a Mainland China company. In other words, if a Hong Kong (or Macao) tax resident employee is employed by a Mainland China company and works full time in Mainland China, this Notice should not be applicable.
2. Methods of Calculation
In order to eliminate double taxation in Mainland China for Hong Kong (and Macao) tax resident employees, the SAT now accepts the time apportionment of the salary and bonus income on the “physical presence” basis. In other words, only the days on which the individual is physically present in Mainland China is to be counted when applying the prescribed time apportionment formulae used to calculate the Individual Income Tax (“IIT”) liability in Mainland China.
a. If a Hong Kong (or Macao) tax resident stays in Mainland China for no more than 183 days in any 12-month period, the following formula is applied:
IIT Payable = IIT on Total Income for the Period Concerned × (Number of Physical Presence Days in Mainland China for the Period Concerned ÷ Number of Calendar Days for the Period Concerned) × (Income Paid/Borne in Mainland China for the Period Concerned ÷ Total Income for the Period Concerned)
b. If a Hong Kong (or Macao) tax resident stays in Mainland China for more than 183 days in any 12-month period, the following formula is applied:
IIT payable = IIT on Total Income for the Period Concerned × (Number of Physical Presence Days in Mainland China for the Period Concerned ÷ Number of Calendar Days for the Period Concerned)
“The Period Concerned” in the above formulae refers to the periods over which the relevant salaries and wages, bonuses and similar payments are taxable for PRC tax purposes. The Notice also provides that in calculating the number of physical presence days, the day of arrival, the day of departure and the same day travel will be counted as half a day in Mainland China.
3. Record Filing
The Hong Kong (and Macau) residents bear the responsibility to report and file with the competent tax authorities when paying IIT according to the Notice.
Many Hong Kong (and Macao) tax residents currently suffer double taxation since their work requires extensive travel in Mainland China, that is, the same amount of income may be taxed both in Mainland China as well as in Hong Kong (or Macao) respectively.
The Notice attempts to minimize the impact of such double taxation by clarifying the calculation of IIT under such circumstance. Therefore, it brings great news to many Hong Kong and Macao tax resident employees working cross border in China and their employers.