1. PRC IIT for Expatriates and Cross-Border Business Travellers 18 th March 2010 Presented by Kathy Siu – Principal kathy.siu@azuretax.com kathy.siu@azuretax.com

2. Refresher on PRC IIT Domiciled Yes Expatriates IIT on WW IncomeResidence Status + Source No PRC National 1

3. Domicile test Taxpayer’s personal connection within China - Usually or habitually resides in China due to:- household registration family ties economic relationship (IITIR, Art 2) 2

4. Expatriates – What is the IIT liability? Depends on Residence Status Source of Income 3

5. IIT Liability for Expatriates Residence Status > 5 full years Worldwide Income Source of Income > 1 year < 5 years PRC sourced income + Non-PRC sourced income borne by PRC entities PRC sourced income PRC sourced income that is paid or borne by an establishment in China > 90 / 183days < 1 years < 90 / 183days 4

6. IIT Exemption for Expatriates + < 90 / 183 days Remuneration costs not borne by a PRC entity or deemed to have been borne by an establishment in China E.g. Permanent Establishment Representative Office 5

7. IIT Exemption for Expatriates (Con’t) 1. Chief Representative of a Representative Office (“RO”) - his costs are deemed to be borne by the RO and therefore subject to IIT Exceptions 2. Expatriates working on a project that is deemed as a PE in China 3. Expatriates employed by a China entity 6

8. Days Counting Rules 1.For counting 90 / 183 days purpose (include working and non- working days) Entry day – 1 day Exit day – 1 day Entry + exit same day – 1 day 7

9. Days Counting Rules (Con’t) 2. Counting actual working period for IIT calculation purpose (working days only) Entry day – 1/2 day Exit day – 1/2 day Entry + exit same day – 1/2 day 8

10. Example : John Smith, a Hong Kong resident, spent the following number of days in China in 2008 and 2009. His working days are noted in blue colour For counting 90/183 days purposes : 191 days (twelve months from 1.Oct.2008 to 30.Sep.2009) For counting actual working period for IIT calculation purposes : 2008 – 37 days 2009 – 138.5 days JanFebMarAprMayJunJulAugSepOctNovDec 1½1½ 4343 6565 1½1½ 20 18 20 10 Days Counting Rules (Con’t) 2008 : 2009 : JanFebMarAprMayJunJulAugSepOctNovDec 10 8½ 20 19 20 16½ 10 9 20 15 20 15½ 10 9 20 18 20 19 10 9 191 days (i.e. >183 days) 9

11. Days Counting Rules (Con’t) 3. One full year If lived in China for 365 days in a calendar year - Ignoring temporary absence from China:- Single trip of 30 days or less Multiple trips totalling 90 days or less 10

12. Days Counting Rules (Con’t) 4. Five full years If lived in China for 5 full years consecutively, and each year’s temporary absence :- 30 days or less for single trip 90 days or less for multiple trips, in total Subject to IIT on Worldwide Income from the 6th year if continue to live in China 11

13. To break 5-year rule Make one single trip > 30 days (excluding exit and entry days) or Multiple trips > 90 days (excluding exit and entry days) In the 5th year or prior In the 6th year Stay in China for < 90/183 days (Recalculate) or 12

14. Filing obligations Tax registration with the local tax bureau, where taxpayer usually resides or performs his employment duties Monthly filing and withholding, by 7th of the following month Annual filing by 3rd month after year end if taxpayer fulfilled one of the following:- -also receives overseas income -with annual income > RMB 120,000 & stayed in China for one full year - 2 sources of employment in China -with taxable income but no withholding agents 13

15. Progressive rates : from 5% 45% (9 tax brackets) Monthly deduction of RMB 4,800 for expatriates. Portion of monthly taxable income (with gross-up) Portion of monthly taxable income (without gross-up) Tax rate Quick Deduction Up to RMB475Up to RMB5005%RMB0 RMB476–RMB1,825RMB501–RMB2,00010%RMB25 RMB1,826–RMB4,375RMB 2,001– RMB 5,00015%RMB125 RMB4,376–RMB16,375RMB 5,001– RMB 20,00020%RMB375 RMB16,376–RMB31,375RMB 20,001– RMB 40,00025%RMB1,375 RMB31,376–RMB45,375RMB 40,001– RMB 60,00030%RMB3,375 RMB45,376–RMB58,375RMB 60,001– RMB 80,00035%RMB6,375 RMB58,376–RMB70,375RMB 80,001– RMB 100,00040%RMB10,375 RMB70,376 and aboveRMB 100,001 and above45%RMB15,375 IIT rates 14

16. Non-taxable income for expatriates Reasonable BIKs on reimbursement basis supported by valid receipts:- -PRC Housing rental -Business travel expenses -2x home trip tickets for expatriate only -Meal and laundry expenses -Language training expenses -Children education costs incurred in PRC -Relocation and moving expenses 15

17. Non-taxable income for expatriates (con’t) Example Annual salary Housing Allowance Home leave Child education Language training Total Package USD 100,000 30,000 5,000 23,000 2,000 160,000 USD Taxable 100,000 Non-taxable - Total taxable income 100,000 Total packagePRC IIT Taxable Income 16

18. Cross-border work arrangements 1. Frequent travelling into China -Overseas employment contract -No specific assignment 2. Secondment -Second to a China entity for a specified period of time -Defined job duties and job title in the China entity 3. PRC employment -Employed by a China entity -No overseas employment contracts 4. Dual employment contracts – HK and PRC employment contracts -Two distinct roles, PRC role and Hong Kong role -Two separate employment contracts -But difficult to convince tax authorities 17

19. To claim Income exemption or tax credit in Hong Kong depending on each case 18

20. 19 Days Income sourced in ChinaIncome sourced outside China Borne by Chinese entity Borne by Overseas entity Borne by Chinese entity Borne by Overseas entity < 90/183 daysTNT > 90/183 days < 1year TTNT > 1year < 5years TTTNT > 5 yearsTTTT IIT Implications on Cross-border employees T = TaxableNT = Non-taxable 19

21. PRC – Time apportionment claim Expatriates working in China may file monthly IIT on time apportionment basis if all three conditions are met :- Concurrently holding a position with an entity outside China while on China assignment / employment Required to spend some days during a month performing non- China related duties outside China, and their non-China related wages would not be borne by a China entity  Total employment income (both China + Overseas) need to be reported and IIT calculated fully. The total tax liability will then be prorated based on the number of days physically spent in China. 20

22. Recent Updates 21

23. Directors’ fees vs Employment income 22

24. Directors’ fees Previously :- -taxable as “Personal Services Income” at 20% up to RMB 20,000 Now:- -taxable as salary + wages at progressive rates from 5% to 45% Guoshuifa [2009] 121 (“Circular 121”) Effective from August 2009 23

25. Secondment vs Permanent Establishment 24

26. Secondment -Secondees working under the supervision and control of the China entity, carrying out activities that benefits the China entity. -China entity borne the payroll costs of the Secondees - IIT Carrying out projects / providing services in China – P.E. -Secondees in substance working under the supervision and control of the Overseas employer, providing services to the China entity. -Overseas company might be deemed as constituting a PE in China - CIT - BT - IIT 25

27. Double Pay and Annual Bonus 26

28. Double Pay Previously :- -Taxed separately as an additional month’s salary in the month it is received (without any monthly allowable deduction), not being topped up to the normal monthly salary and taxed at higher marginal rate. Now :- -Topped up to the normal monthly salary and taxed at the applicable marginal rate Guoshuifa [2009] 121 Effective August 2009 27

29. Annual Bonus Discretionary one-time annual bonus : Taxed in the month of receipt at preferential rate to determine the top marginal tax rate Annual Bonus 12 28

30. Guoshuihan [2009] No.694 Qualified Plan Non-Qualified Plan Overseas Pension Plan e.g. MPF Effective 10 December 2009 Enterprise Annuity Plan 29

31. Enterprise Annuity Plan (“Qualified Plan”) IIT implications to Employee :- Employer’s contributions – taxable as employment income of the employee in the month contributions are made – taxed separately from the monthly salary with no additional monthly allowable deduction – Not deductible in calculating employee’s IIT liability Employee’s contributions 30

32. Q & A 31