Update: please see our two newer posts (9 January and 10 January) with even more proof that China does not have citizenship-based taxation.
Update 2: Chinese tax expert Bernard Schneider of the Queen Mary University of London School of Law has stated that The New York Times article is incorrect and that China does not tax non-resident Chinese citizens on their non-China income. Please see his full comments to Virginia La Torre Jeker, tax lawyer based in Dubai, reported in her column on AngloINFO (in the update at the bottom). Professor Allison Christians also notes that other experts she knows have written to her to refute the NYT article. We are still awaiting a correction from the NYT.
In an article on Wednesday (to which I was alerted by kermitzii in our comments section), The New York Times makes the following assertion:
China Wants Taxes Paid by Citizens Living Afar
… national and municipal tax agencies in China are quietly beginning to enforce a little-known and widely ignored regulation: Citizens and companies must pay domestic taxes on their entire worldwide incomes, not just on what they earn in China.
The nascent campaign this winter puts China on the same side as the United States in a global debate over whether taxation should be primarily national or global. On the other side of the issue are European nations, Japan, Australia and Canada, all of which tax people within their borders but exempt most expatriates and overseas subsidiaries from paying income taxes in their home countries.
The bolded text, however, is incorrect. Eritrea is the only country left “on the same side” as the United States in this debate. China, just like Japan, Australia, Canada, and European countries in general, taxes resident individuals on their entire worldwide income, and non-resident individuals on their domestic income. This is clear even from a cursory reading of China’s Individual Income Tax Law: it’s in the very first article.
China’s method of determining an individual’s tax residence is not particularly unusual. It does not look to citizenship whatsoever, but instead relies mainly on household registration and the location of one’s family members and economic interests; the regulations are similar to (though less detailed than) the “sufficient ties” test in the UK or the “residential ties” test in Canada. Nor is this definition in flux: it has remained basically unchanged for the past two decades. The only real difference is that the bureaucracy in China is less responsive and harder to navigate.
After the jump I provide translations of the relevant Chinese laws and regulations regarding this point, as well as a quote from a book by two actual Chinese tax law professors.
Table of contents
- The wrong questions about the wrong concepts
- The real issue: who is a “taxpayer”?
- Definition of zhusuo
- No attempt to impose other new financial reporting requirements on non-residents
- Some living abroad temporarily may still owe Chinese taxes
- The role of tax treaties
- China’s treaties avoid double tax residence, not create it
- The misunderstanding about the $210 exclusion
- The kernel of truth
- Conclusion: what is citizenship-based taxation?
The wrong questions about the wrong concepts
The main source of confusion about China’s system of individual taxation seems to be the writer’s conflation of the two distinct concepts of “taxation of resident individuals who earn overseas income” and “taxation of non-resident citizens who earn income where they live” under the single label of “worldwide taxation” (which almost always refers to the former concept).
The writer also mixes in some discussion about the debate on how to tax resident corporations. That debate is entirely separate, and I won’t discuss it further in this post, except to point out here that there’s no logical tie between taxing the worldwide income of resident corporations and taxing the worldwide income of non-resident citizens: almost all countries which do the former do not do the latter. The fact that the U.S. happens to do both doesn’t mean that there’s any common policy rationale underlying those two decisions.
And then, there’s this odd diversion:
The roots of China’s decision to embrace worldwide taxation trace to the early 1990s. Still a very poor country then, China sent teams of tax officials to the United States, Britain, Germany and other nations to seek advice on drafting a modern tax code.
One team sent to the United States visited state tax officials in California and New York, said Lili Zheng, a Deloitte accountant who coordinated the visit and is now co-leader of the firm’s Asian international investment practice. The team paid a long visit to the Internal Revenue Service and was given a two-volume bound copy of the United States tax code and a five-volume copy of I.R.S. regulations.
Chinese officials chose the American definition of income, with its worldwide scope, in issuing their tax code in 1993. It remains in force today, although with many amendments.
The American definition of income (26 USC 61) is not what imposes the onerous tax filing requirements on non-resident U.S. citizens, and similarly the Chinese definition of income (Article 2 of the Individual Income Tax Law) does not turn suddenly citizens abroad with no economic ties to China into Chinese taxpayers.
When it comes to individuals, both definitions of income — and indeed the definitions of income used in most countries on the planet — include taxpayers’ wages, and investment income regardless of the location of the investments (except some such income arising inside government-approved savings plans). This should not be a surprise to anyone.
The real issue: who is a “taxpayer”?
What’s actually unusual about the American system is its definition of who is a taxpayer, the person to whom the tax law applies. This definition is quite hard to find if you are not familiar with the “Internal” Revenue Code: it is located two-dozen-odd paragraphs into the seventy-somethingth chapter, and isn’t even explicit about what it’s defining:
(30) United States person
The term “United States person” means—
(A) a citizen or resident of the United States …
The Chinese definition of who is a taxpayer, in contrast, is much easier to find: it is located in the very first article of the People’s Republic of China Individual Income Tax Law (No. 44 of 2005). It explicitly delineates the differing obligations of residents and non-residents, without reference to citizenship. You may refer to the Ministry of Commerce’s official translation if you prefer; here I do my own translation, because I’m a pedant with quibbles over a few words:
|第一条 在中国境内有住所，或者无住所而在境内居住满一年的个人，从中国境内和境外取得的所得，依照本法规定缴纳个人所得税。||Article 1: An individual who has a zhusuo in mainland China, or who does not have a zhusuo but has resided in the mainland for a period of one year, shall pay individual income tax on income derived from mainland China and outside in accordance with the provisions of this law.|
|在中国境内无住所又不居住或者无住所而在境内居住不满一年的个人，从中国境内取得的所得，依照本法规定缴纳个人所得税。||An individual who does not have a zhusuo and does not reside in the mainland of China, or who does not have a zhusuo and who has resided in the mainland for less than a year, shall pay individual income on income derived from mainland China in accordance with the provisions of this law.|
For now, I’m not bothering to translate the word zhusuo. In this context the civil code and the tax regulations give it a specific definition, which I discuss below. MofCom translates zhusuo as “domicile”, a practice which most I’ve seen followed in most English-language literature on Chinese tax law. However, I don’t want people to confuse zhusuo with other Chinese words that also get translated as “domicile” (for example juji 居籍, used in the Chinese version of Hong Kong’s Domicile Ordinance), and furthermore in non-legal discussions zhusuo could also just mean “the place where you live”. (Japanese has even borrowed the same word, pronounced jusho there, to mean “address” as in a street address.) In any case, zhusuo certainly doesn’t mean “citizenship”!
I translated jingnei as “mainland” and jingwai as “outside of the mainland”, in contrast with MofCom’s translation as “within China” and “outside of China”. Unlike guonei (国内), jingnei excludes Hong Kong and Macau. China has explicitly written its tax laws so that they do not apply in Hong Kong and Macau, and under the Basic Laws of those two Special Administrative Regions, Beijing waived its right to impose taxes there anyway.
Definition of zhusuo
For a country to tax the worldwide income of its residents, first it must decide who is a resident for tax purposes. Sometimes, people living abroad might be regarded as tax resident in a country if they retain significant personal or household ties to the country. Furthermore, citizenship may be one factor in the determination of tax residence: it may lower the threshold of personal or familial connections at which the authorities will treat the person as a tax resident. Finally, in a few European countries (most notably Spain), citizens who move to certain listed tax havens may be treated as though they continued to remain tax resident in Spain for a certain period of time.
In China, as is clear from the portion of the IIT Law quoted above, the determination of tax residence is based on either zhusuo or actually living in mainland China. Zhusuo is first defined in the General Principles of the Civil Law.
|第十五条 公民以他的户籍所在地的居住地为住所，经常居住地与住所不一致的，经常居住地视为住所。||Article 15: The zhusuo of a citizen shall be his place of household registration; if his habitual residence is not the same as his zhusuo, his habitual residence shall be regarded as his zhusuo.|
The Chinese government’s English translation of the General Principles renders zhusuo as “domicile” and huji as “resident registration”; here, I’ve translated huji with the more typical “household registration”, and I don’t translate zhusuo at all. (This can get very confusing: I’ve also seen huji (mis?)translated as “domicile”, but as Article 15 makes clear, huji and zhusuo may differ). You may also note that this is the first and only time gongmin (the Chinese word for “citizen”) appears in this post — in a context which explicitly confirms that a citizen’s zhusuo is not necessarily his place of household registration.
In the specific case of the tax law, the definitions of “has a zhusuo in mainland China” and “has resided in the mainland for a period of one year” are provided for in PRC Individual Income Tax Implementation Ordinance (State Council Order No. 142 of 28 January 1994; subsequent amendments did not affect the definition of zhusuo, meaning that it’s been the same for the past two decades).
|第二条 税法第一条第一款所说的在中国境内有住所的个人，是指因户籍、家庭、经济利益关系而在中国境内习惯性居住的个人。||Article 2: In Article 1, Paragraph 1 of the Tax Law, “an individual who has a zhusuo in mainland China” means an individual who by reason of household registration, family, or economic interests habitually resides in mainland China.|
|第三条 税法第一条第一款所说的在境内居住满一年，是指在一个纳税年度中在中国境内居住365日。临时离境的，不扣减日数。||Article 3: In Article 1, Paragraph 2 of the Tax Law, “has resided in the mainland for a period of one year” means residing in the mainland of China for 365 days within a tax year, without subtracting days for temporary departures from the mainland.|
Articles 6 and 7 of the Implementation Ordinance further describe the situation of people without zhusuo in mainland China; again, they are quite clear that if you do not have zhusuo, individual income tax on income from outside of mainland China ("worldwide taxation") only applies to you if you actually reside in mainland China, and even then you might be exempt:
|第六条 在中国境内无住所，但是居住一年以上五年以下的个人，其来源于中国境外的所得，经主管税务机关批准，可以只就由中国境内公司、企业以及其他经济组织或者个人支付的部分缴纳个人所得税；居住超过五年的个人，从第六年起，应当就其来源于中国境外的全部所得缴纳个人所得税。||Article 6: An individual who does not have a zhusuo in mainland China, but resides for one year or more and five years or less, may pay individual income tax only on that portion paid by companies, enterprises, and other economic organisations or individuals in mainland China; an individual who resides for more than five years shall, from the sixth year onward, be subject to individual income tax on all income from sources outside of mainland China.|
|第七条 在中国境内无住所，但是在一个纳税年度中在中国境内连续或者累计居住不超过90日的个人，其来源于中国境内的所得，由境外雇主支付并且不由该雇主在中国境内的机构、场所负担的部分，免予缴纳个人所得税。||Article 7: An individual who does not have a zhusuo in mainland China, but within one tax year lives in mainland China for a continuous or total period not exceeding 90 days, shall be exempt from the payment of individual income tax on income from sources within mainland China, that portion of which is paid by a non-mainland employer and not by the Chinese mainland organisation or location of that employer.|
No attempt to impose other new financial reporting requirements on non-residents
The Chinese government has shown no recent trend of seeking to extend other financial reporting requirements to citizens permanently resident abroad either. For example, there was an update to the International Payments Statistical Declaration Regulations about a year ago (State Council Order #642 of 19 November 2013). This imposed a new requirement on Chinese residents to report foreign financial assets (in addition to reports on foreign payments already required). However, the Chinese government made no update to the existing definition of “Chinese resident” which had been in effect ever since 1996.
Below is the translation I made when that update was promulgated; I quote only the portion relevant to natural persons:
|本办法所称中国居民，是指：||In these regulations, “Chinese residents” refers to:||（一）在中国境内居留1年以上的自然人，外国及香港、澳门、台湾地区在境内的留学生、就医人员、外国驻华使馆领馆外籍工作人员及其家属除外；||(1) Natural persons residing in Chinese territory for one year or more, excluding foreign, Hong Kong, Macau, and Taiwan students and medical care seekers in Chinese territory, and foreign diplomatic and consular personnel stationed in China and their families;|
|（二）中国短期出国人员（在境外居留时间不满1年）、在境外留学人员、就医人员及中国驻外使馆领馆工作人员及其家属；||(2) Chinese persons who leave the country for short periods (time of residence abroad less than one year), students studying abroad, medical care seekers, and Chinese diplomatic and consular personnel stationed abroad and their families;|
This is even more lenient than the tax law definition of Chinese resident; unlike the FBAR requirement imposed by the U.S. Bank Secrecy Act of 1970, it recognises the fact that even people residing abroad on a temporary basis for longer than a year will naturally need a bank account where they live in order to conduct ordinary personal finance, that people with such bank accounts are not doing anything unusual or untoward, and thus they should not be burdened with onerous paperwork and thousands of dollars of fines in the name of “fighting money laundering”.
Some living abroad temporarily may still owe Chinese taxes
In general, cancelling one’s household registration is part of the process of emigrating from mainland China, though in some situations even people who cancelled their household registration may still be deemed tax residents. (Dealing with the household registration bureaucracy is also no fun, in particular if you’ve already moved overseas.)
In their book The System and Management of Chinese Tax Collection (Tsinghua University Press, 2005), Mr. Tang Gongliang and Ms. Liang Junjiao, professors at the Central University of Finance and Economics, describe one such situation.
Professors Tang & Liang’s book was published before the 2005 amendments to the Individual Income Tax Law and its regulations, but as mentioned above those amendments did not affect the basic definition of who has zhusuo. Again, I have left the term zhusuo untranslated; jusuo (居所) I translated as “place of residence”. At page 178:
|所谓习惯性居住或居所是在稅收上判断居民和非居民的一个法律意义上的标准，不是指实际居住或在某一特定时期内的居住地。例如，个人因为学习、工作、探亲、旅游等而在中国境外居住的，当其在境外居住的原因消除之后，则必须回到中国境内居住。那么，即使该人并未居所在中国境内，仍应将其判定为在中国有习惯性居住。所以，我国个人所得税法中所说的“住所”，其概念与通常所说的住所是有区别的。||Habitual residence, or place of residence, is a standard of legal significance under which a person is judged to be resident or non-resident for tax collection purposes, and does not mean the actual residence or the location in which one resides during a certain period of time. For example, if someone resides outside of mainland China because of study, work, visiting relatives, or travelling, when his reason for living abroad is eliminated, he will necessarily go back to living in mainland China. So, even if this person does not have a place of residence in mainland China, the person is still judged to have habitual residence in China. Thus, the concept of zhusuo in our country’s Individual Income Taxation Law is distinct from the word zhusuo as ordinarily used.|
|【例 ８－１】中国公民李小姐受公司委派前往公司驻美国办事处工作，任职时间为2年。赴美国前，依据政府有关规定，她到户籍管理部门办理了户口注销手续。受经济条件的限制和自身工作、学习的需要，李小姐的丈夫和孩子仍留在中国。||[Example 8-1] Chinese citizen Ms. Li is sent by her company to work in its U.S. office for a period of two years. Before going to the U.S., in accord with the relevant government regulations, she visits the household registration management department to handle the procedures for cancelling her hukou. Due to economic limitations and the requirements of their own work or study, Ms. Li’s husband and child remain in China.|
|李小姐驻美期间，公司驻美国办事处每年支付其工资收入折合人民币15万元，同时，中国境内公司仍按月支付其工资收入2000元，由于李小姐对企业管理很有见地，驻美期间，她写出了一部如何加强企业管理的专著，并在美国一家出版机构出版，取得稿酬收入折合人民币3.5万元。当年，李小姐只就中国境内公司支付的每月2000元工资缴纳了个人所得税，而对美国办事处支付的工资和从美国取得的稿酬收入并未申报纳税。||While she is stationed in the U.S., the company’s U.S. office pays salary equivalent to RMB 150,000 each year, and at the same time, the mainland China company still pays her wages of RMB 2000 each month. Because Ms. Li has insights into business management, while stationed in the U.S., she writes a book about how to strengthen business management, which is published by a publishing company in the U.S., for which she receives royalty income equivalent to RMB 35,000. In that year, Ms. Li paid individual income tax on the RMB 2000 paid by the Chinese mainland company each month, but did not report the wages paid by the U.S. company or the royalty income received from the U.S.|
The final sentence refers to what the hypothetical Ms. Li actually did, rather than what the law says she should have done. As Professors Tang & Liang point out, she should have paid tax on all of her income; however, that’s certainly not because of her Chinese citizenship, but because the location of her family members and her intention to return to mainland China after a defined period abroad makes it clear that she still has zhusuo there:
|【分析与处理】现行税法规定，凡在中国境内有住所，或者无住所而在境内居住满1年的个人，为中国个人所得税的居民纳税人，负有全面纳税义务，应就来源于中国境内和中国境外的全部所得在中国纳税。李小姐出现的问题，主要是因为混淆了自己的纳税人身份，即将居民纳税人误以为非居民纳税人。虽然她在出国前注销了户口，自然在中国已没有了户籍。||[Analysis and handling] Under the present tax laws, any individual who has a zhusuo in mainland China or who does not have zhusuo in the mainland but lives there for one year, is a tax resident for purposes of Chinese individual income tax, and must pay taxes on their whole income from sources within mainland China and outside mainland China. The problem which Ms. Li faces is primarily that she has confused her taxpayer status, and misunderstood herself to be a tax non-resident instead of a tax resident. It is true that she cancelled her hukou before leaving the country and thus does not have household registration in China anymore.|
|但是由于其家庭和主要经济利益关系仍在国内，并且她只是为了履行职务才在美国居住，一旦任期届满，她必然要返回中国，也就是说，她在中国境内仍具有税收意义上的住所，只要有住所，无论其是否在境内居住，都是居民纳税人。因此，根据税法的规定，她在美国期间，仍然属于中国个人所得税的居民纳税人，其取得的来源于中国境内、境外的全部所得都应依法缴纳个人所得税。||However, her family and economic interests are still in the mainland, and she only resides in the U.S. for job purposes and will return to China as soon as her time is up; that is to say, she still has zhusuo in China for tax purposes, and as long as you have zhusuo, it does not matter whether you live in the mainland or elsewhere, you are a tax resident. Because of this, under the provisions of the tax law, she is still classified as a tax resident for Chinese income tax, and under the law should pay individual income tax on all income received from sources within and outside of mainland China.|
The role of tax treaties
Neither Professors Tang & Liang above nor The New York Times discuss the effect of tax treaties on residence determinations.
When an individual moves from one country to another, as a result of conflicting laws he might be regarded as “tax resident” in both countries for some time thereafter. Even if each of those countries’ unilateral foreign tax credits ensure that no double taxation actually results from this situation, there could still be a bunch of pointless paperwork for both the individual in question and the tax authorities — pure deadweight loss, creating an artificial disincentive for people to move between countries.
Most countries solve this problem by signing tax treaties, in which each country gives up part of its authority to treat someone connected to that country as a tax resident; the ideal is to ensure that an individual is a tax resident of one and precisely one country, not two countries or zero countries. The individual may then be subject to tax on his worldwide income by the country of which he is a tax resident, but in a country of which he is not a tax resident he may only be subject to tax on income from within that country. (The sole exception is the United States: it insists that every tax treaty it signs must include a “saving clause” under which the other country recognises the U.S. power to tax non-resident U.S. citizens on their non-U.S. income, regardless of their ties to the country in which they actually live and their lack of ties to the United States.) The mechanism for enforcing singular tax residence is the definition of “resident”, usually found in Article 4.
The procedures for a person who has Chinese zhusuo under the Individual Income Tax Law to claim non-residence under a tax treaty remain under-documented. Most of the professional discussion about claiming tax non-residence in China under a tax treaty seems instead to focus on foreign employees who do not have zhusuo. The lack of attention to treaty residence of people who have mainland Chinese zhusuo is not surprising: the ones who are physically present in mainland China for the year would not likely have any claim to treaty non-residence, while up to now there has been no attempt at tax enforcement against the ones who were temporarily absent from mainland China during the year and earning wages abroad.
In the future, such attempted enforcement might lead affected taxpayers to attempt to resort to a tax treaty in response, in turn spurring the State Administration of Taxation to clarify the procedures, but for now all we can do is to look at the available regulations and forms. At the basic level, temporary regulations promulgated in 2009 created new procedures for non-residents to claim tax treaty benefits. The information form relating to an individual taxpayer in that situation (somewhat equivalent to IRS Form 8833) asks in Item 24 whether the tax filer has zhusuo in China. Beyond that, it’s hard to say anything about the procedures & standards.
China’s treaties avoid double tax residence, not create it
Starting in mid-2013, Beijing began signing new tax agreements with several European countries, to update ones that were decades old: the Netherlands in May 2013, Switzerland four months later, France near the end of the year, Germany in March 2014, and Russia in October that year. Germany has more than 100,000 Chinese citizens living there (and although Germany and China have similar top-bracket individual tax rates, China’s kicks in at far lower income), while Switzerland is a migration destination for highly-skilled workers and HNWIs of many nationalities.
Both countries would thus be attractive targets for any alleged Chinese plan to impose taxation on citizens abroad, and if the Chinese government actually had such plans, they’d make sure that their new DTAs didn’t hamstring them in this regard. However, none of the new DTAs (nor any of the old ones) contain an “own-citizens saving clause” allowing China to impose tax on Chinese citizens resident in the other country as if the DTA did not exist; France in particular should be familiar with such clauses and might not have objected to the inclusion of one, since they put one in their own recent treaty with Andorra, but it seems that China didn’t bring up the issue.
Nor do any of China’s DTAs include a “non-discrimination saving clause” stating that citizens of a Contracting State are not considered to be in the “same circumstances” as non-citizens even if both are non-residents of that State (a clause included in the U.S.’ 1982 DTA with New Zealand, for example); China’s DTA with France has a residence-based non-discrimination saving clause specifying that residents are not in the “same circumstances” as non-residents for purposes of non-discrimination but saying nothing permitting discrimination between non-resident citizens and non-resident non-citizens, while the non-discrimination articles of the Dutch, German, Russian, and Swiss DTAs do not even have the resident vs. non-resident discrimination clause.
With regards to residence tiebreaker tests (Article 4), all of these DTAs followed the OECD model under which nationality only comes into play as the third tiebreaker if a taxpayer has double permanent homes, habitual residence, centres of economic interests, and domestic-law tax residence. (For completeness, I note that the Russian DTA adds additional non-OECD Model tiebreaker provisions, but at an even lower priority than nationality.) And the DTAs even limit China’s existing zhusuo-based taxation of temporary expats by stating (Article 15) that China could only tax employment income derived in the other country if a Chinese tax resident spent less than 183 days in the other country and worked for a Chinese company.
The China-U.S. tax treaty, which has not been updated since 1984, has somewhat unclear procedures for tax residence “tiebreaking” when a Chinese or other non-U.S. citizen is a tax resident of both the U.S. and China under the respective municipal laws, but more recent treaties have far clearer rules. For example, here’s what the China–Ecuador treaty says about tax residence of individuals. (The English version is identical to the OECD Model Convention of 2003, aside from the replacement of “Agreement” with “Convention” and the use of “place of effective management” instead of “place of management”.) In the Chinese version, the word zhusuo appears twice: in Paragraph 1 it corresponds to “domicile”, while in Paragraph 2(a) it corresponds to the word “home” in the phrase “permanent home”.
Article 4: Resident
|一、在本协定中，“缔约国一方居民”一语是指按照该缔约国法律，由于住所、居所、成立地、实际管理机构所在地，或者其他类似的标准，在该缔约国负有纳税义务的人，并且包括该缔约国及其行政区或地方当局。但是，这一用语不包括仅因来源于该缔约国的所得而在该缔约国负有纳税义务的人。||1. For the purposes of this Agreement, the term “resident of a Contracting State ” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of incorporation, place of effective management, or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State.|
|二、由于第一款的规定，同时为缔约国双方居民的个人，其身份应按以下规则确定：||2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:|
|（一）应认为仅是其永久性住所所在国的居民；如果在缔约国 双方同时有永久性住所，应认为仅是与其个人和经济关系更密切（重要利益中心）的缔约国的居民;||a) he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests);|
|（二）如果其重要利益中心所在国无法确定，或者在缔约国任何一方都没有永久性住所，应认为仅是其习惯性居处所在国家的居民；||b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode;|
|（三）如果其在缔约国双方都有或者都没有习惯性居处，应认为仅是其国籍所属国家的居民；||c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national;|
The misunderstanding about the $210 exclusion
The New York Times states:
The United States also allows expatriates to exempt a slowly rising sum of foreign earned income, which amounted to $99,200 last year. It then taxes the rest. In China, overseas citizens are eligible only for an extra deduction of $210 for each month they are overseas.
The $210 exclusion mentioned appears to be the one mentioned in Individual Income Tax Law Article 6, Paragraph 3 (for short I’ll call it the “6(3) Deduction”). I conclude this because in the 2011 amendment to the Individual Income Tax Implementation Ordinance, the amount of that exclusion (defined in Article 29 of the Ordinance) was set to RMB 1300, which Google tells me is US$209.25 at current exchange rates; it is the only exclusion with that value. Anyway, the definition of the exclusion:
|对在中国境内无住所而在中国境内取得工资、薪金所得的纳税义务人和在中国境内有住所而在中国境外取得工资、薪金所得的纳税义务人，可以根据其平均收入水平、生活水平以及汇率变化情况确定附加减除费用，附加减除费用适用的范围和标准由国务院规定。||With regards to a taxpayer who does not have zhusuo in mainland China but receives wages or salary in mainland China, or who has zhusuo in mainland China but receives wages or salary from outside of mainland China, there shall be an extra deduction on the basis of the average income level, the living standard, and the exchange rate fluctuation. The State Council shall make provisions regarding the scope and standard of the extra deduction.|
Judging from the symmetric nature of the 6(3) Deduction (allowed for anyone earning wages “away from home”, not just for locals who earn wages abroad), it seems to be premised on the idea that taxpayers living “away” from their normal home have some extra expenses and so should enjoy an extra personal tax exemption.
As far as I can see there is no good analogy to the 6(3) Deduction in the U.S. tax code, nor to the FEIE in the Chinese tax code. The American analogue of “a taxpayer who does not have zhusuo in mainland China but receives wages or salary in mainland China” would be a non-resident alien who earns U.S. wages (usually an international student); that situation is discussed in Publication 515. The American equivalent of “a taxpayer who has zhusuo in mainland China but receives wages or salary from outside of mainland China” is either a U.S. citizen outside of the U.S. temporarily (who is covered by the FEIE) or a U.S. citizen doing remote work for a foreign employer (who receives no particular special tax treatment under the Internal Revenue Code).
In any case, the definition of the 6(3) Deduction says nothing about a taxpayer who does not have a zhusuo in mainland China and receives wages from outside of mainland China. Such a person might be someone residing in China temporarily during the year (e.g. an international student) who does remote work for a foreign employer, in which case he pays Chinese individual income tax as specified in Article 6 of the Implementation Ordinance (quoted in the previous section). Alternatively, that person might be someone who resides outside of China and receives wages where they live — in which case, as already stated, they are not subject to Chinese individual income tax in the first place.
The kernel of truth
The New York Times writes:
As Chinese individuals and companies head overseas in greater numbers, the country’s tax authorities are starting to follow.
The Beijing billionaires who set up cryptically named companies in the British Virgin Islands to hold their fortunes are in the cross hairs. So are the Guangdong salesmen living and working in Africa and Latin America …
The government of Guangzhou, the commercial hub of southeastern China, has summoned executives from 150 of the largest corporations based there to a meeting on Jan. 28 to discuss the obligation of their overseas employees to pay Chinese taxes. Municipal governments in Beijing and other big cities are also contacting big companies in their jurisdictions and telling them to provide detailed information on the expatriates’ incomes, tax advisers said.
Judging from this description, the meeting in Guangzhou was about collecting tax from people who are employed by Chinese companies, particularly in developing countries where they are unlikely to bring their families, acquire local citizenship, or otherwise settle permanently. These people probably retain household registration in China or have immediate family still living there for educational reasons or because they’re afraid of conditions in their destination countries; see for example this 2011 series of interviews with Chinese expats in Africa, in which many of them mentioned they came without their families.
This means that under the law, these people likely remain tax residents of China. If they were Canadians, they would probably be similarly unsuccessful at challenging a determination by Revenue Canada that they remained tax residents of Canada (see a Canadian accountant’s article on this problem).
There might be an exception if a relevant tax treaty defined them as non-residents; however, China’s tax treaty network in Africa and Latin America is not yet very broad. According to the list on the State Administration of Taxation website, China has signed 99 tax treaties as of 2013, but only 13 of those were with any of the 50-odd countries of Africa, and only four among the 20 countries of Latin America.
Conclusion: what is citizenship-based taxation?
Many countries have broad definitions of “tax residence” which can result in the imposition of tax on people who aren’t residing in that country during a given tax year — but only if their personal or household ties exceed the thresholds defined in domestic legislation and tax treaties, making it reasonable to conclude that they might soon return. In simpler terms, if a person has a house and dependent family members in a country in which he recently resided, then those family members continue to enjoy government services as residents — and the person himself has also enjoyed those government services in the recent past, will likely once again do so in the imminent future, and may even be continuing to do so during “visits” home. This more or less accords with the basic philosophy of taxation as participation in bearing the expenses of the government of one’s home community, for a reasonable definition of “home”.
Citizenship-based taxation is something else entirely. It is an ideology which uses the mere fact of your nationality — imposed without any choice of yours in the matter, and expensive to renounce — as an excuse to ignore your choice to call another country “home” for good and your lack of ties to the country imposing the tax. And it means that in addition to the user fees you might pay for embassy services, the government claims the power to force you to contribute to services it provides only to its residents — a group of people which does not include you, and which the government has no reasonable basis to assume ever will.
In the U.S. case, citizenship-based taxation rarely results in actual U.S. tax on foreign wages, due to the Foreign Earned Income Exclusion and the Foreign Tax Credit. Instead, the U.S. government imposes tax and hundred-hour paperwork requirements on income which is tax-deferred or receives simplified taxation & reporting treatment under your local system: for example, unrealised appreciation inside of retirement plans and even savings vehicles to provide for the livelihood of disabled persons. And now with FATCA, the U.S. is even threatening non-U.S. banks which do business with you — with the unsurprising result that many local banks no longer want to do business with you, leaving you without financial services either in the country where you live or the U.S. whose “protection” you also enjoy as a “citizen abroad”.
China as a country has many flaws and lacks many freedoms, but at least it uses the same basic system of taxation followed by nearly every democracy and dictatorship: a system which avoids placing unreasonable barriers in the way of the basic human right to leave a country.
Not quite on topic, but another factually-challenged article from the same journalist at the NYT
The article appears to have been based on a misunderstanding of the following government press release
New General Principles of the Civil Code
Zhusuo still has a sane definition. Notable change: they removed the word “citizen” from the definition. My unofficial 30-second translation:
Analysis of the main post stands.