We explore the implications of a new regulation from the State Administration of Taxation (SAT) addressing the double-taxation burden encountered by Hong Kong and Macau tax residents who exercise employment duties in mainland China. The new policy, Announcement 16, came into effect on 1 June and is applicable to employment income earned from this date.
In the past, although country-based time apportionment was applied to salaries, the rule relating to bonus was rigid. "In many cases, the bonus could be subject to full taxation in China if you spend at least one day per month in China, while full exemption was not available in Hong Kong. As an example, when someone only spent 30 per cent of their time in China, 70 per cent of the bonus would be double taxed," says Jacky Chu, partner, PricewaterhouseCoopers.
The new regime allows time apportionment on bonuses. "This can create tremendous savings for those whose role is largely bonuses based," says Phil Wang, manager, FieldOne Foreign Investment Service.
Another change is the number of days counted in taxation, which used to include the days employees spent on holiday and at work in Hong Kong and Macao. Chu says: "Now according to the new rule, physical days, including workdays and holidays, spent in Hong Kong and Macao will be excluded for China tax purposes."
The policy comes as a relief for both taxpayers and employers. "If the employee is originally employed in Hong Kong, there's a big gap on incremental tax liabilities in the two locations: while the maximum tax rate is 15 per cent in Hong Kong, it’s 45 per cent in China. In many cases, the employer will subsidise the additional tax burden for these employees, so the new rule in essence eliminates the tax burden and employment cost for the company. It definitely encourages them to mobilise their staff to work in China," adds Chu.
However, the rule is not applicable to all Hong Kong or Macao employees. "It's for people who have responsibilities and services to provide across borders. If they only work in China and come to Hong Kong for weekends and holidays, they are not subject to double tax in the first place as Hong Kong will not tax them."
It will also benefit some foreign expats who have suffered double-tax burdens. "They should also be entitled to the same treatment if they are qualified as tax residents for the purpose of the China/Hong Kong and China/Macao income-tax arrangements. But discretion is applied as to whether they have close ties, or family/economic interests in countries other than Hong Kong or Macao. If they do, even though they work in Hong Kong, they cannot apply for this rule," adds Chu.
The application of the rule is not automatic. Chu says: "If individuals and companies want to enjoy this benefit, they need to complete the Circular 124 record-filing requirement with the local Chinese tax office. As part of the process, they need to obtain a tax residence certificate issued by the Hong Kong or Macao tax authorities."