Taxation of the Chief Representative of a Representative Office in China

Scenario

Mr. A, the chief representative of the USCorp Shanghai Representative Office. Mr. A is based in the United States of America but is required to make regular trips to Shanghai. As such, he is liable to pay Individual Income Tax in the People's Republic of China from the time he assumed the chief representative position. Every month, he must declare his income and pay PRC income tax, as from the start of his appointment. Mr. A's tax liability is determined by apportioning his total wages and salary according to the amount of time he spends inside and outside China in any given month.

Calculating the Amount of Income Tax

The basis for calculating Mr. A's monthly income tax is as follows:
(Total Salary for the Month x # of Days Spent in China) / # of Days in the Month
When calculating the number of days he spends in China, Mr. A should include the day on which he enters the country, but exclude the day on which he leaves. Any days spent outside China for personal reasons should be treated as if he remains in China. Mr. A's employment letter should include a term stipulating his duties and responsibilities out of China in order to support his claim for apportioning the time spent outside China. This will help avoid the tax authorities claiming that all the time outside China is for personal reasons.

To help in Mr. A's tax planning, the following is a brief summary of the PRC treatment of individual income tax.

Scope of Wages and Salaries

Pursuant to PRC tax laws and regulations, wages and salaries include cash awards, bonuses, allowances, subsidies, bonus, and other compensations received by Mr. A during the course of his employment. However, Mr. A should check with his legal advisers on the taxability of other compensation items as a number of items are "temporarily exempted from individual income tax" pursuant to tax notices issued by the SAT. Mr. A heard that his Chinese language training expenses, paid home leave, and generous medical benefits are temporarily exempted from individual income tax.

In any event, Mr. A has been told that for any non-taxable items, he should provide valid evidence of the amounts incurred (which should be reasonable), for example, invoices or receipts.

Tax Rates

The Individual Income Tax rate will vary on a sliding scale, ranging from 5 to 45 percent, according to the amount of Mr. A's taxable monthly income.
The Individual Income Tax Law provides that foreign personnel with PRC-sourced income may receive extra deductions based on their average income level, their standard of living, and exchange rate changes, as determined by the State Council.

Calculating the Amount of Monthly Payments

The formula for calculating the amount of tax Mr. A is required to pay is as follows:
(Amount of Taxable Wage and Salary Income for the Month x Applicable Tax Rate - Amount of Quick Calculation Deduction) x (# Days Inside China During Month / # Days in Month)

Withholding Tax

Any PRC unit or individual that pays income to Mr. A on which individual income tax is payable must act as a withholding agent. If a withholding agent fails to withhold or collect tax from Mr. A as required, the withholding agent is liable for the tax that should have been withheld or collected, as well as corresponding interest, penalties and/or surcharges. For these purposes, a representative office is a withholding agent, and has to withhold Mr. A's income regardless of whether it is paid in China or is paid offshore.

Payment of Individual Income Tax

The amount of Mr. A's monthly tax liability will generally be deducted from the bank account designated for payment of taxes of the RO by the competent tax authority. The tax liability could also be settled by payment of cash, bank transfer or check to the tax authority directly.