South China Morning Post
China’s tax authorities are tightening personal income tax law by extending the dragnet to income earned globally, with employees of state-owned enterprises based in Hong Kong first to feel the pinch, according to people involved in the matter.SOE workers hired in the mainland and expatriated to the city received a directive this week to declare their 2019 salaries and make up any shortfall caused by the different tax rates in the two regions, they said, declining to be identified because of the sensitivity surrounding the matter.The order from the State Tax Administration is seen as the first step of Beijing extending its reach to millions of Chinese working and studying abroad. Many countries have cooperated and strengthened the global exchange of income and tax information in recent years, primarily to screen the flow of money to combat money laundering and terrorism financing.Get the latest insights and analysis from our Global Impact newsletter on the big stories originating in China.The new directive has not only caught many of the estimated 80,000 state employees in Hong Kong by surprise, the people said. It has also stoked discontent among them because of the hefty arrears caused by the wide gap in taxation rates between the two jurisdictions.Hong Kong’s income tax rate is among the lowest globally, capped at 15 per cent for top earners. In China, the tax rate goes up to as high as 45 per cent for annual income exceeding 960,000 yuan (US$136,810).Beijing intends to clarify and apply the full force of its tax laws that were previously neglected in practice, according to Ellen Tong, tax director of Deloitte China, who has advised a number of SOEs in Hong Kong on the subject.“Many Chinese working overseas did not understand the tax law clearly in the past, and some thought they don’t have the obligation to report their income as long as they have left [mainland] China and are not employed by a Chinese company,” said Tong. “This is exactly what the Chinese tax authorities want to alter, with the latest tax reform.” Why China’s high-income earners dread the new tax law that will come into effect in JanuaryThe dragnet coincides with the first tax reporting season since China tightened its individual income tax law in January 2019. Under the reform, the Chinese government will impose its tax regime on the worldwide income of workers deemed as Chinese residents for taxation purposes.The Chinese law defines a tax resident as any “China-domiciled” individual – those who “habitually reside in China because of their legal residency status, family, or economic ties” – or anyone who spends at least 183 days in a tax year in the country.The so-called “China-domiciled” individuals would encompass Chinese nationals stationed abroad for the purposes of studying, working, travelling or visiting family and who would return to China when those purposes are completed, according to a statement issued by the tax authority in April 2019.Chinese nationals are generally considered to have a domicile in China, according to PwC. The definition, however, excludes residents of Hong Kong, Macau, and Taiwan, who are deemed non-China-domiciled individuals, it said.While the latest push only affects mainland employees working for SOEs, the rule would be applicable to a much wider group of overseas Chinese workers, including those employed by foreign companies in different countries, according to Deloitte’s Tong.Mainland Chinese companies now employ about 80,000 workers in Hong Kong, according to the Hong Kong Chinese Enterprises Association, a local trade body. However, about 90 per cent of them are local employees, it said. The number of mainland Chinese working or residing in Hong Kong ranges from 80,000 to 150,000, according to unofficial estimates.Tong said SOEs and their employees should get updated on Chinese tax laws to achieve better communication on their benefits and salary packages.“In many other countries, such as the US, citizens would have to pay taxes on their worldwide income,” she added. “If companies could provide help, such as briefing on tax systems by external tax experts, they would be much clearer on their obligations.” Purchase the 100+ page China Internet Report 2020 Pro Edition, brought to you by SCMP Research, and enjoy a 30% discount (original price US$400). The report includes deep-dive analysis, trends, and case studies on the 10 most important internet sectors. Now in its 3rd year, this go-to source for understanding China tech also comes with exclusive access to 6 webinars with C-level executives. Offer valid until 31 August 2020. To purchase, please click here.More from South China Morning Post: * China county government censured over illicit tax collection in sign of local fiscal woes * China’s fiscal first quarter revenue declines over 14 per cent, weighed down by coronavirus, tax relief * Hong Kong stocks stampede into a bull market, while Shanghai sees biggest one-day gain in five years on expected China recovery * National security law: five differences between Hong Kong’s new legislation and 2003’s shelved Article 23 bill * Worldwide coronavirus cases top 12 millionThis article China extends tax dragnet to worldwide income, with state employees in Hong Kong first to feel the pinch first appeared on South China Morning PostFor the latest news from the South China Morning Post download our mobile app. Copyright 2020.