China has introduced the new foreigner income tax policy and it will be effective from this coming January. Some of the foreign working professionals will be greatly impacted, while others will be less so. Regardless, these new foreigner income tax policies will affect everyone working here on a work visa, so it’s critical that everyone understands what these new foreigner taxes are, what you’re getting into by paying for social benefits, and what this all means in the long run.
The first point to make is that this isn’t about a single policy change, but rather a series of changes to the foreign individual income tax (IIT) that are all taking place at the same time. It “begins” or rather “began” with changes to the Chinese social benefits contribution and will continue with the elimination of allowances through tax deductions for working foreigners in January 2022.
Healthcare Insurance & Pension Fund
The new social advantages for foreigners, IIT law makes paying for social “benefits” mandatory rather than optional.
Starting in mid-August 2021, the government announced that it would begin enforcing the social benefits contribution (healthcare insurance and pension fund) for foreigners and would levy significant fines on companies and employees who failed to comply.
The housing fund, healthcare insurance, and pension fund are examples of social benefits. Foreigners are exempt from the housing fund, so we won’t get into that.
Without going into too much detail, healthcare insurance costs 2% of your gross salary and provides adequate coverage at Chinese public hospitals. The pension fund deducts 8% of your gross salary. That amounts to 10% of your gross salary going to social benefits. When you leave China, you can claim both of these funds. Your full pension and any unused healthcare insurance benefits will be paid back to you, but for most foreigners, having 10% less cash in hand is an inconvenience to say the least.
No More Allowances – Coming January 2022
Foreign nationals (and locals) are allowed to deduct expenses from their gross salaries (up to 30%) when calculating taxes under the current version of the Chinese Individual Income Tax Law. Rent, meals, and school fees for those of us with children are common expenses, as are other items deemed “acceptable” by your companies.
The new IIT law will take effect in January 2022, making it illegal for foreigners to deduct expenses from their taxable income. Understandably, this is the “smack down” change that will cause a large number of foreign nationals to leave China. The more money you make, the more this policy affects you. In other words, the more money you make, the more likely it is that you will leave China because of this.
Consider there is a person, an expat on a $1,000,000 yearly package. He pays 200,000 in rent per year and $100,000 in school fees for his child. His taxable income is reduced to $70,000 due to the deductibles (rent and education). He falls into the 30% tax bracket and pays $130,000 in taxes for the year. He receives $570,000 for his wife to spend.
Without deducting expenses, This person is now in the 35% tax bracket, with taxable income just under $1,000,000. In addition to his expenses, he now has to pay over $240,000 in taxes. Instead of 570,000, he receives 460,000.
This affects every foreigner who benefits from expense deductions. With the current system, someone earning a comfortable 30,000 per month can deduct up to $900 in expenses. That works out to about $28,200 after taxes. After January 2022, this will be $26,400 after taxes, not including the social benefits contribution.
Conclusion and what this means
Without a doubt, a significant number of expats will leave China in 2022. Because their bottom line is lower and employers do not have the same cost incentives to hire foreigners. Furthermore, with the social benefit, you can expect 10% of your pay to be withheld without any added value.
That being said, it’s also important to consider how this could benefit foreign talent in China.
For one thing, a lower supply of foreign talent in China means more pressure on demand in most cases. Some of you may recall when being a citizen of a native English-speaking country was made a requirement for obtaining a work visa as an English teacher. During the pandemic, only work visa holders were allowed to remain in China, and we saw an influx of teaching jobs with very high entry salaries >30,000/month pop up left and right. While the resulting landscape will not be as dramatic, there is a chance that something similar will occur and demand will adjust to the new supply.
One argument against this is the influx of overseas Chinese returning to China as a result of the pandemic. These are Chinese citizens who have lived, studied, and worked in other countries. Many of them speak English and other languages fluently. They are well adapted to western culture and can fill “foreigner” positions more than adequately. However, similar to the pandemic situation, in many cases, this influx is transitory and not long-term. Already, the number of people returning to China is significantly lower than last year, and many are planning their return trip.
Whatever happens, the most important thing is to be ready for what is to come, to plan ahead, and to enjoy the rest of the year.
