Sticker Shock: New rules mean higher taxes for Taiwanese employees sent to the mainland
With their sizable investments in Mainland China, it is not surprising that many Taiwanese employees are sent to live and work on the mainland every year. In most cases, they will be paid separately in Taiwan and Mainland China, and so they will also file separate income tax returns for the two jurisdictions. Based on the principle of taxing in the country of employment, this tax filing method is incorrect. In the past, the tax authorities on one side of the strait were unable to conduct active investigations on the other side, which kept the risk of being audited low. Beginning this year (2006), however, this kind of tax risk will start to have a major impact on tax burdens on both sides of the strait.
PRC authorities recently issued "Regulations Governing Personal Income Tax" and amended related provisions of the Individual Income Tax Law to require taxpayers to regard all wage and salary income earned inside or outside of China’s borders as income from within China’s borders, and to file individual income taxes on that consolidated income. Consequently, when employees sent to the mainland by their Taiwan parent companies file taxes next year, they will have to include salary and bonuses paid by their Taiwan parent companies this year. The end result of these regulations is that income paid in Taiwan faces double taxation on the part of the tax authorities on the two sides of the Taiwan Strait.
On the Taiwan side, the tax authorities have begun aggressively pursuing audits where companies account as an expense the salaries of personnel working in Mainland China, and whereby the companies reduce their income taxes. If the taxation authorities find that an employee essentially resides in Mainland China, the employee’s entire salary will be excluded from expenses. Nevertheless, when it comes to income tax for the employee stationed on the mainland, the tax authorities may in practice view the salary paid by the Taiwan company to be Taiwan-source income subject to withholding and payment of tax. If tax has been paid on that income in Mainland China, there may be no way to credit the amount against tax in Taiwan.
Consider this example: an employee stationed in China is paid the equivalent of NT$1 million in salary by his company’s mainland subsidiary, and from the parent company in Taiwan receives another NT$1 million in salary plus stock bonuses with a market value of NT$1 million (10,000 shares with a face value of, say, NT$100,000). In the past, the parent company could write off NT$250,000 in corporate income tax by claiming the salary it paid as an expense. The employee would file separate returns for NT$1.1 million and NT$1 million in Taiwan and Mainland China, respectively, and pay a total of NT$420,000 in income tax (assuming a tax rate of 20%). Starting this year, under the PRC’s new tax rules, the employee will have to declare NT$3 million in salary and pay NT$750,000 in taxes (assuming a marginal tax rate of 25%). In the employee’s Taiwan tax return, he or she will also have to declare salary income of NT$3 million, but because tax was already paid in China and at a higher rate, no additional income tax must be paid. Finally, if the parent company claimed the NT$1 million in salary as an expense, that amount will be excluded on the grounds that the employee is a long-term resident in Mainland China, and a bill for NT$250,000 in unpaid tax will have to be paid. The net result is that the tax burden for company and employee combined will go up by NT$580,000.
For firms that send large numbers of employees to work in Mainland China, the increase in tax burden from the rule changes described above will be onerous. In the future, with the expensing of stock bonuses added to the use of market value to value shares when calculating the minimum tax payment, the impact on the income tax burdens of corporations and individuals will be even greater. Corporations must act quickly, therefore, to adjust how they pay salaries and bonuses in order to lower their tax risks and burdens.