"CBT or not?" asks Barbara at the Issac Brock Society: China extends tax dragnet, with state employees in Hong Kong first to suffer https://t.co/OQoKGsGm5e via @scmpnews
— U.S. Citizen Abroad (@USCitizenAbroad) July 10, 2020
Introduction and background
In 2015, Eric contributed a brilliant post to the Isaac Brock Society in which he concluded that:
No, China does not have have citizenship-based taxation
I highly recommend the post and the comments. Eric concludes with an interesting summary of what citizenship-based taxation is and what citizenship-based taxation is not.
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.
And now the July 9, 2020 South China Morning Post Article, invites the question again … China extends tax dragnet to worldwide income, with state employees in Hong Kong first to feel the pinch
No, China is not moving in the direction of citizenship-based taxation. The article does NOT say that China has asserted tax jurisdiction over Hong Kong. The article does not say that China is imposing extra-territorial taxation on the world. (In contrast the United States begins by imposing worldwide taxation on every person in the world, but then exempts nonresident aliens.) The article says that China is asserting tax jurisdiction over individuals who meet the test for tax residency in China.
The article claims that the definition of tax residency in China is:
The Chinese law defines a tax resident as any “China-domiciled” individual – those who “habitually reside in China because of their legal residency status, family, or economic ties” – or anyone who spends at least 183 days in a tax year in the country.
This is a normal definition of tax residency. A definition that is similar to the definition of tax residency in Canada. The article focuses on the imposition of taxation on:
SOE workers hired in the mainland and expatriated to the city received a directive this week to declare their 2019 salaries and make up any shortfall caused by the different tax rates in the two regions, they said, declining to be identified because of the sensitivity surrounding the matter.
These are individuals domiciled in China who are working in Hong Kong.
The fear, is this the beginning of something bigger and more expansive?
What is the Chinese definition of domicile? Is Chinese nationality a sufficient condition of Chinese domicile?
The article continues …
Chinese nationals are generally considered to have a domicile in China, according to PwC. The definition, however, excludes residents of Hong Kong, Macau, and Taiwan, who are deemed non-China-domiciled individuals, it said.
The article by Eric surgically dissects the general claim that Chinese domicile is established by Chinese nationality. But, even if Chinese nationality were a sufficient condition to establish Chinese domicile …
China has a number of tax treaties which include tax treaty tie-breakers. The purpose of the treaties is to allow tax residents of China who are also tax residents of the treaty parter country to be taxed as resident of only one country. China’s tax treaties do NOT include (as do the US treaties) a “saving clause” which prohibits Chinese tax residents from severing tax residency with China. Article 4 of the Canada China tax treaty says:
1. For the purposes of this Agreement, the term “resident of a Contracting State” means any person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of head office, place of management or any other criterion of a similar nature.
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:
a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);
b) if the Contracting 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 Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;
c) if he has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national;
d) if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
To be clear, this means that, unlike US citizens, Chinese citizens are free to emigrate from the country of their birth, become tax residents of other countries and not be subject to rules of Chinese tax residency.
What about the long term? The article includes:
The order from the State Tax Administration is seen as the first step of Beijing extending its reach to millions of Chinese working and studying abroad. Many countries have cooperated and strengthened the global exchange of income and tax information in recent years, primarily to screen the flow of money to combat money laundering and terrorism financing.
Yes, the general trend of the tightening and increasing of tax jurisdiction is continuing.
That said, there is nothing about the article that suggests China is moving toward citizenship-based taxation. China has and continues to commit many abuses against individuals. But, when it comes to the abusive definitions of tax residency and other human rights violating tax policies, the United States stands alone.
When it comes to definitions of tax residency, to compare China to the United States, is a gross insult to China!
It really is looking more and more like China has implemented CBT. If it’s just taxing those who remain domiciled in China for 183+ days a year, then why would so many Chinese expatriates be preparing to pack up and return to China?
Those complaining about the high cost of rent in Hong Kong presumably have rented apartments, meaning they’re domiciled in Hong Kong, in effect a “foreign” tax territory as far as the PRC is concerned, so if it’s really just RBT, then their pain would only last one tax year and they’d have no reason to give up everything. Short term expats, especially bankers (as singled out in the article below) are likely subsidized by their employers, so they wouldn’t have that complaint. It all really starts to add up to China imposing CBT.
Finally, Eric’s article cited above was written in 2015. The news report below mentions opaque changes to the Chinese tax law in January 2019 which are the source of the present panic.
It seems unclear, but I do wonder if the CRS has sparked a new interest in hunting down citizens abroad for taxation?
All this data sharing is a tyrants dream come true.
I vaguely remember from reading the relevant articles in 2015 (I have not carefully reread them recently) that China was imposing taxation on non-resident individuals who were “domiciled” in China, where “domiciled” means “intends to reside in China in the long term”. This implied that someone who had previously lived long-term in China and who went abroad for a temporary job (or to study etc.) but was not a permanent resident of the new country was technically still tax-resident in China. So I guess this would be “domicile-based taxation”.
As you say though there’s a reference to some unclear law of 2019 which may have either expanded on this policy or introduced CBT.
With respect to the 2019 tax law amendments in China, see:
The article includes the following paragraph which says:
It seems to me that the employees of State Owned Enterprises would be domiciled in China. Although this can overlap with citizenship-based taxation it is certainly not always the same thing. Also, those domiciled in China can use tax treaty tie breakers to sever tax residence with China.
Good interview with John Richardson and Bernard Schneider on this topic: