Info Centre | Updates on Individual Income Tax Changes

The Chinese government has been implementing staged changes to tax regulations since 2018 with the objective of simplifying and equalizing tax across multiple areas. While these changes are not confined to foreign workers or businesses but there are some changes that directly impact foreigners working in China.  

The next tranche of change is scheduled for implementation in January 2022 and will see the removal or reduction of various tax-free or tax-deductible items for foreign workers. These include:

The impact on foreign workers with children studying in international schools is particularly significant with overall education costs likely to increase significantly. For example – in the case of someone with two children attending international schools, paying the average Shanghai tuition rate, the tax burden could easily increase by north of 150,000 RMB per year (depending on salary).

AustCham Shanghai recommends that all businesses calculate and model the impact on their business and employees. If you are currently unclear on how the changes will impact you or your business and would like some professional advice – please contact the AustCham Shanghai Relationship Management team at mike.cheung@austchamshanghai.com and they will connect you with a tax adviser who can provide a consultation. 

Tax-deductible benefits, like those above, were originally provided to create an internationally competitive labor market capable of attracting high-end foreign talent and to encourage foreign workers to spend their earnings in the local economy. Overall, the original policies can be said to have been successful.  

The stated intention of the changes is to create a more equal labor market for local, returning, and foreign talent.

In a recent survey, AustCham Shanghai members indicated that they are committed to operating in the Yangtze River Delta but that the tax changes would have a considerable impact on their ability to run their business. 
  

Significantly, up to 25% of businesses would consider moving outside Shanghai for more attractive operating conditions. This might include moving domestically within China to another city or province or moving either all or part of the business to another regional center. 

Perhaps even more importantly, more than 75% of members indicated that the changes would make it hard to attract and retain the high-end talent that is required to run their businesses successful.

The majority of businesses that responded to the survey were small or medium enterprises (SME) with less than 20 staff members. The impact on these businesses will likely be proportionately more severe. The inability for SMEs to attract and retain foreign talent for a small number of critical roles may create significant operational constraints.

This issue has been ongoing since before the first tranche of change were introduced in 2019. Members should be preparing for the changes to be introduced in full on 1 January 2022.

That said, there is still some room for consultation and potential changes to implementation. AustCham Shanghai has met with the Foreign Affairs Office (FAO) and undertaken initial consultations and is now in the process of communication with other government departments. Various other Chambers of Commerce are conducting similar engagements with Chinese Government.

The FAO also invited AustCham Shanghai to visit the Lingang Special Area which has a 15% flat income tax rate, and other attractive policies, and is being touted as a possible alternative for Shanghai based companies. While this option certainly has merit, it requires more investigation and may not be a realistic option for companies who require a downtown Shanghai location.

Further communication is being prepared that demonstrates the value of foreign enterprise in China, the impact these changes might have on foreign businesses, and the desire of foreign businesses to see Shanghai develop as a vibrant international city.

AustCham Shanghai holds the view that while many of the changes are fair and reasonable, some changes may still need consideration. Specifically:

• Education

• Talent attraction

Education

The current view to impose tax on education spending doesn't seem to be in line with all of the policies objectives. As foreign workers are unable to access local Chinese schools they have no other option but to enroll their children in international schools and pay related fees. The taxing of school fees should be reconsidered in some way – reducing this burden would greatly assist in attracting and retaining high-end talent and would be in line with the policies intention of equalizing the tax impacts for foreigners and locals.

Talent attraction

Shanghai is on the fast path to becoming a true global city. The attraction of foreign talent is an important part of this development – not just for the diversity of cultural and commercial skills they bring to the economy but also because of the important international and multicultural dynamic they bring to the city. The development of the Lingang Special Area notwithstanding, Shanghai should aim to be as competitive as possible regarding the attracting of high-end talent, capable entrepreneurs, foreign regional headquarters, and investment particularly when matched against Shanghai's domestic and international competitors – namely Shenzhen and Singapore. AustCham Shanghai wishes to work with stakeholders to ensure that our members are supporting the cities goals.

Not a member of AustCham Shanghai yet?

AustCham Shanghai membership provides access to support, education, advocacy and business services, as well as events and networking opportunities. To find out more, please visit our website or contact our senior relationship manager Mike Cheung at mike.cheung@austchamshanghai.com.