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The tax treatment of
bonuses in China has changed remarkably since the State
Administration of Taxation (SAT) issued the tax circular Guo Shui Fa
[2005] No. 9. The circular came into effect on 1 January 2005.
Annual performance
bonuses
If an expatriate receives an annual performance bonus of, say, RMB60,000 (inclusive of any year end salary increase) that is determined according to the annual
economic results of his company, as well as his annual work performance, the Individual Income Tax (IIT) payable on his annual performance bonus will be calculated as
follows:
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1.
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Determine the applicable top marginal IIT rate and quick calculation deduction
(QCD) factor by dividing the annual performance bonus by 12,
i.e.
RMB60,000 / 12 = RMB5,000.
Hence, the applicable top marginal IIT rate is 15% and the QCD factor is RMB125. (see column 1 of the Table: Chinese Individual Income
Tax).
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2.
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Calculate the IIT payable on the annual performance bonus by employing the applicable top marginal IIT rate and QCD
factor:
RMB60,000 x 15% - RMB125 = RMB8,875.
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On the other hand, if the expatriate's monthly salary is, say, RMB4,500, which is less than the allowable monthly standard deduction of RMB4,800, and assuming that he receives an annual performance bonus of RMB6,300, then the applicable top marginal IIT rate and QCD factor are determined as
follows: |
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3.
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[RMB6,300 - (RMB4,800 - RMB4,500)] / 12 = RMB6,000 / 12 =
RMB500.
Hence, the applicable top marginal IIT rate is 5% and the QCD factor is
RMB0.
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4.
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The IIT payable is
then:
[RMB6,300 - (RMB4,800 -RMB4,500)] x 5% - RMB0 =
RMB300.
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Note that in each fiscal
year, every taxpayer is only allowed to apply the above tax
calculation methodology once.
Other bonuses
The tax circular specifies that all other bonuses, such as semi-annual bonuses, quarterly bonuses, overtime bonuses, etc. received in a month should be combined with that month's regular salary in order to determine the IIT payable,
i.e.:
IIT payable = (other bonuses + regular monthly salary - monthly standard deduction) x applicable IIT rate - applicable QCD
factor
Using the numbers in the previous example and assuming that the other bonus received in the month is RMB6,300, the IIT payable
is:
(RMB6,300 + RMB4,500 - RMB4,800) x 20% - RMB375 =
RMB825.
If an individual is not domiciled in China (owing to personal connections in China) and receives other bonuses during a month when he does not have any IIT payment obligations, or when he has worked in China for less than a full month due to overseas trips made in that month; the IIT payable on the other bonuses received in the month should be calculated according to the tax circular Guo Shui Fa [1996] No. 183, which requires the other bonuses received in the month to be treated as a separate monthly salary. No deduction of the monthly standard deduction will be allowed and no time apportionment will be allowed even though the individual has worked in China for less than a full month. The IIT payable is calculated as
follows:
IIT payable = Other bonuses x applicable IIT rate - applicable QCD
factor
Using the same numbers as in the above example, the IIT payable
is:
RMB6,300 x 20% - RMB375 =
RMB885.
Tax treatment of annual performance bonuses when the tax is paid/borne by the
employer
The SAT issued the tax circular Guo Shui Han [2005] No.715 on 7 July 2005 to clarify the tax treatment of annual performance bonuses when the tax is paid/borne by the
employer.
| 1.
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Divide the annual performance bonus by 12 and look up the applicable top marginal IIT rate and QCD factor (see Table: Chinese Individual Income
Tax).
If the annual performance bonus is say, RMB60,000; RMB60,000 / 12 =
RMB5,000.
The applicable top marginal IIT rate is 20% and the applicable QCD factor is
RMB375.
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| 2.
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Determine the grossed up annual performance bonus as
follows:
Grossed up annual performance bonus = (annual performance bonus - applicable QCD factor) / (1 - applicable IIT
rate)
(RMB60,000 - RMB375) / (1- 20%) = RMB59,625 / 80% =
RMB74,531
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| 3.
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Divide the grossed up annual performance bonus by 12 and look up the applicable IIT rate and QCD factor from column 1 of the IIT
table.
RMB74,531 / 12 = RMB6,211
The applicable top marginal IIT rate is 20% and the QCD factor is
RMB375.
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| 4.
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The IIT payable on the annual performance bonus
is:
IIT payable = Grossed up annual performance bonus x applicable IIT rate - applicable QCD
factor
RMB74,531 x 20% - RMB375 =
RMB14,531.
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Where tax is borne by the employer, if the individual's regular monthly salary is less than the allowable monthly standard deduction, then the amount of annual performance bonus has to be adjusted, before applying the above calculation methods, as
follows:
Annual performance bonus - (monthly standard deduction - regular monthly
salary)
Note that the IIT borne by the employer is not deductible to the employer if it is an enterprise, a sole proprietorship, a partnership or an individual industrial and commercial
household.
daisy.ip@gthk.com.hk
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