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How to Calculate Foreigners' Income Tax in China?
The collection of income tax in China has a history of 30 years. The first Individual Income Tax Law of the People's Republic of China was passed on the Fifth National People's Congress held on September 1, 1980, determing the threshold for personal income tax to 800 yuan. Since then, China has formulated its own individual income tax system.
During the 30 years, the threshold for personal income tax continues to increase. The main reason for the on-going change is to implement the distributive social justice, as well as to narrow the nationwide income gap. The income tax reform of each phase has basically achieved the expected goal.
In most cases, individual income tax is usually filed by employers on behalf of employees. However, both parties should be aware of tax thresholds, and implement sufficient salary planning to reduce tax liability. In this article, TopTutorJob helps foreign individuals to better understand the Chinese tax system and calculation of income tax.
What Are the Pros and Cons of Chinese Tax System?
The individual income tax system of the United States is a comprehensive system. All types of income, regardless of its source, are included in the scope of taxation. Then the income tax payable is calculated after the legal exemption and deduction procedures.
The greatest strength of the comprehensive system is that, it can fully reflect the affordability of taxpayers. However, in such a system, it requires to establish a categorized standards for different groups of people. Therefore, there are hundreds of declaration forms with complicated filling instructions for taxpayers.
On the contrary, China has a classified system. Not all taxpayers have to pay individual income tax. Whether the personal income needs to be taxed is determined by the amount that is above the threshold or not. The individual income tax is calculated according to the tax rate and special deduction.
Simple and cost effective are two significant advantages of the clasified tax system. However, the drawback is that, the tax system is one size fits all, which leads to the lack of income adjustments.
How is Individual Income Tax Calculated in China?
China taxes individuals who reside in country for more than 183 days on worldwide earned income. The following paragraph is going to explain how tax is calculated on the income sourced from China.
Basic Concepts:
Initial Deduction (Tax Threshold):
A tax exemption of 4,800 RMB per month for foreign individuals is granted.
Tax rate:
China adopts a progressive taxation system. The personal income is taxed on a seven-level progressive tax rate, from 3% to 45%.
Quick Deduction:
A quick deduction amount will be exempted additionally for the corresponding level of taxable income.
The table below shows the sevel-level tax rate on monthly income, as well as the quick deduction of the corresponding level:
| Level | Initial Deduction | Taxable Income Range | Tax Rate | Quick Deduction |
| 1 | 4,800 | 1,500 and Below | 3 | 0 |
| 2 | 4,800 | 1,501 - 4,500 | 10 | 105 |
| 3 | 4,800 | 4,501-9,000 | 20 | 555 |
| 4 | 4,800 | 9,001-35,000 | 25 | 1,005 |
| 5 | 4,800 | 35,001-55,000 | 30 | 2,755 |
| 6 | 4,800 | 55,001-80,000 | 35 | 5,505 |
| 7 | 4,800 | 80,000 and Above | 45 | 13,505 |
Special Additional Deduction:
The special additional deduction of personal income tax refers to the six deductions on child education, continuing education, serious illness medical treatment, housing loan interest, housing rental and supporting the elderly stipulated in the personal income tax law. It is one of the supporting measures to implement the newly revised individual income tax law.
Starting from January 1, 2019 to December 31, 2021, foreign residents in China can choose either to have special additional deduction on individual income tax, or to have tax exemption on three major allowances - housing rental, child education and language training. However, since January 1, 2022, tax exemption on three major allowances coming to an end, replaced by six special addtional deductions only. How will China income tax reform affect foreign teachers?
Basic Calculation Formula:
For residents, calculation of IIT on comprehensive income is using the following formula:
(Annual/Monthly Taxable Income x Tax Rate) - Quick Deduction
Taxable income: after deducting the standard basic deduction, specific deductions, specific additional deductions, and other allowable deductions.
Examples:
Case 1:
Eric has a gross monthly salary of 10K, how much should he pay for income tax?
| Gross Salary | 10,000 |
| Taxable Income | 10,000-4,800=5,200 |
| Tax Rate | 20% |
| Quick Deduction | 555 |
| Tax payable | 5,200*20%-555=485 |
Case 2:
Bella has a gross monthly salary of 10K, with monthly rental allowance of 2K, which is tax deductible, how much should she pay for income tax?
| Gross Salary | 10,000 |
| Taxable Income | 10,000-4,800-2,000=3,200 |
| Tax Rate | 10% |
| Quick Deduction | 105 |
| Tax Payable | 3,200*10%-105=215 |
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