China Tax Reform May Spell Disaster For Expatriate Talent

China’s 2018 review of and changes to its individual income tax system will come into effect in 2021.

During the opening up of China to the rest of the world, foreign workers were the only demographic affected by the introduction of individual income tax as locals didn’t earn enough to have to pay. Since then, a spectacular increase in average salaries has taken place, yet only some 2 per cent of Chinese workers pay the tax. Even although 2 per cent of the population amounts to some 28 million Chinese, the government now believes some 187 million should be paying.

Last year’s tax reform laws were intended to lower taxes due in the middle and lower-income groups, with urban professionals bearing the brunt of the reforms. However, those working in China’s impressive shadow economy as well as the ‘filthy rich’ find it straightforward to avoid paying at all. In any case, the top tax bracket is still set at 45 per cent on annual earnings of over 960,000Rmb ($143,000). Previously, expat earnings were exempt from paying tax on foreign earnings until they’d been living and working in the country for five, years, a ruse which attracted a huge number of entrepreneurs, tech start-ups and suchlike.

Expats making China their home were also given special exclusions for education, housing and home leave costs, with the housing exclusion in particular saving new arrivals a good deal of money as the price of Western-style homes rocketed. All good things, it seems, come to an end. as expats are now to be treated the same as the locals but aren’t in line for tax cuts under the new rules. As a result, expat taxes are due to increase to a level which may scare off the next generation of millennial tech talent.

The new rules will take effect on 1 January 2022, and will mean significant increases in expat tax liabilities. It’s not just individual expats who’ll have to bear the brunt of the new law, it’s also international companies based in China who relocate top talent to the country from their headquarters in the West. Rumours suggest a number are already considering sending their expat employees back to their home base or even dispensing with their services.