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| Jun 2007, Issue 13 |
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New development on individual income tax ("IIT") treatment on housing fund contribution for local employees in China
The MOF and SAT jointly issued a circular Cai Shui [2006] No.10 ("Circular 10") on 27 June 2006. Among its various provisions, Circular 10 provides that if the contribution made to the housing fund by either the employer or the employee does not exceed 12% of the employee's average monthly salary in the preceding year, the contribution made by the employer may be exempt from IIT and the employee's contribution is tax deductible for IIT purpose. Circular 10 also sets a cap such that the employee's average monthly salary in the preceding year shall not exceed 3 times the city average monthly salary in the same year. The city average monthly salary shall be determined by the local government and may vary from year to year. Any contribution in excess of such cap should be taxable for IIT purpose.
Although Circular 10 was issued during middle 2006, the enforcement date varies among different localities. For example, Guangzhou and Dalian have implemented the circular since July 2006 and Shenzhen in September 2006. Shanghai has already implemented the circular and some district tax bureaus require retroactive IIT adjustment from June 2006 and onwards. Beijing implemented Circular 10 by issuing a local Circular Jing Cai Shui [2006] No. 2891 ("Circular 2891") on 9 January 2007 which had not been received by most district tax bureaus until recently.
PwC observation
It is, however, unclear whether in-charge district tax bureaus in Beijing would apply Circular 10 retroactively from June 2006 or from January 2007, the issuance date of Circular 2891, and whether there would be any late payment surcharge imposed on tax underpayment (if any) in case Circular 10 would be applied retroactively.
If Circular 10 is applied retroactively, we foresee that some companies may have difficulties in recouping the under-paid tax (if any) from the resigned employees. In light of the above, it is highly advisable that companies review the housing fund contribution arrangements for their local employees and clarify the uncertainties with their in charge tax bureaus as soon as possible.
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