On March 28, Robert Hodkinson, Stephen Green and Christina Chan of Deloite, ran through the latest updates regarding the UK budget, tax implications and China regulatory changes affecting UK Citizens working in China. The highlights of the discussion are summarised below.
The UK budget
The recent UK budget contained few tax changes. The self-assessment filing deadline moves forward to Sept. 30 for 2007/2008 (Nov. 30 for returns filed electronically). Tax authorities have a twelve month enquiry window from the date of filing (previously twelve months from January 31 the following tax year).
Tax avoidance schemes and disclosure
In 2005, the rules were limited to schemes considered employment arrangements, along with various financial products. The rules have now been extended to all schemes aimed avoiding income tax, corporation tax and capital gains tax, effective July 2006 – resulting in a significant increase in reporting requirements.
Pensions
A number of fundamental change to the pensions regime. There are no limits on benefits from registered arrangements, but there are limits on benefits and contributions that are tax efficient. The annual allowance for 2006-2007 is 215K and the lifetime limit is 1.5M. For non-registered arrangements, contributions will not be taxed going in and do not qualify for tax relief for the employer until paid.
Notable for UK expatriates, foreign residence provides an opportunity for greater tax relief through contributing to a UK pension fund while abroad, which can be used to increase lifetime allowance. There are also new incentives to join an overseas pension scheme, thanks to the new rules, as overseas pension contributors can receive ‘migrant tax relief’ after returning to the UK, through which their foreign plan will be treated as a UK plan.
Foreign employees working in the People’s Republic of China (PRC)
A number of issues specific to those working inside the PRC were touched upon, and are briefly summarised below.
Tax
Two recent circulars have implications for non-PRC nationals. Circular 120 increases scrutiny of individual income taxes, while Circular 35 clarifies tax applicable to income resulting from stock option exercised - the ‘Big 4’ had differing interpretations of stock option tax implications prior to this circular. Employers now have obligations to report the details of all stock option plans offered to employees working in China.
As of 2006, foreigners in China with an annual income exceeding 120,000 RMB must file 12 monthly tax returns and 1 annual one, due by March 31 the following year - the primary implication being more paperwork. Additionally, non-PRC nationals receive a deduction of 4800 RMB per month, up from 4000 RMB - essentially an extra $1000 US extra per year. As of Feb. 2006, employers must report all movements of foreigners spending any time working in China – a change clearly aimed at catching foreigners not paying tax, and one likely to result in closer study of double taxation treaty exemption claims.
Immigration
For incoming foreigners, if their Chinese employer has a registered capital of less then $3M US, they must apply for Z-visa to enter China. In this case, allow more lead-time the as process is more complex for a Z-visa. Business travellers can still travel up to 3 months without a work permit, however note that under Circular 85, employers must nonetheless report all movements of such employees.
Time apportionment claims
While previously most time apportionment claims were accepted, authorities are now beginning to question them and viewing duties carried on outside China as pertaining to the business of the regional (China) office. The issue remains a tricky one. Previously, managers could wait until day 183 inside the country before filing any returns. Authorities are increasingly questioning why returns can’t be filed immediately, then taxes claimed back if a manager’s time spent in China proves to be less than 183 days. The best advice here is to carefully document in detail how a tax exemption is claimed, remembering again that with Circular 85, employee movements are reported anyway.
Timothy Anderson
Originally published in the May 2006 issue of ‘The Beat’, the monthly magazine of The British Chamber of Commerce in Shanghai.
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