Why China’s New Tax Rules Worry Bankers in Hong Kong

(Bloomberg) --

Facing a slowing economy and ever-tighter budget, China has turned its attention to generating more revenue by taxing its citizens living and working outside the country — similar to how the U.S. targets Americans abroad. The drive could undermine the appeal of a post in an expensive city such as Hong Kong or Singapore for thousands of bankers and other white-collar professionals from the mainland. But a lot of details are still murky.

1. What’s changed?

First off, a revised tax code took effect last year that’s intended to lower the burden on the poor and the middle class by making the rich pay more. Chinese citizens have been obliged to pay taxes on their global income for many years. But for those working abroad, it hadn’t been generally enforced. Largely, tax experts say, that’s because there wasn’t a detailed legal basis nor guidelines for coordination. In January, however, Chinese authorities issued instructions on how to comply with the tax law while abroad -- a move that caught many Chinese expats off guard. Chinese state-owned enterprises in Hong Kong started telling workers who had transferred from the mainland to declare their 2019 income so they could pay taxes back home. Employees in other locations such as Singapore got the same message.

2. And?

China has started automatically exchanging information with dozens of jurisdictions -- including Hong Kong and Singapore -- about bank accounts belonging to people subject to taxes in each member country, making it harder to hide.

3. Who does the law apply to?

Anyone domiciled in China can be seen as a tax resident regardless of physical location. A domicile doesn’t refer to a specific property but an overall assessment of your household registration, family relations and economic interests. For those living abroad -- be it to study, work, travel or something like an extended visit -- if they will eventually return to China after removing these factors, they are seen as having a domicile in China, and thus subject to Chinese tax rules. In addition, under the revised law, foreigners working in China are considered tax residents if they reside in China for more than half a tax year -- at least 183 days -- similar to many other countries.

4. What does it mean for the pocketbook?

Investment bankers in Hong Kong, for example, typically earn about 25% to 30% more than those in Shanghai, according to recruiters. Much of that premium gets whittled away by higher living costs, but that’s long been offset by the tax difference: Hong Kong’s highest salary tax rate is only 17%, about a third of the top bracket in mainland China. (Under the new reporting system, the taxpayer would get credit in China for tax paid to Hong Kong, but the difference remains due.) And the revised law doesn’t apply just to paychecks. Income from dividends and property sales are also subject to taxation back home. That’s likely to force many companies to shoulder much of the extra tax burden or risk an exodus of Chinese expats.

5. What’s the impact been?

As of mid-July, it appeared that only employees at state-owned companies who had transferred from China were explicitly instructed to pay taxes in China on their 2019 income. China’s Liaison Office in Hong Kong and the State Taxation Administration didn’t respond to faxes seeking comment.

6. And for workers in other categories?

It’s unclear how Chinese authorities will apply the law to citizens who were hired outside China or work for private companies. Hong Kong companies, for example, have no obligation to report employment and tax details to any authority outside the city -- that remains an individual’s obligation. Tax advisers including Jason Mi, a partner at Ernst & Young in Beijing, recommend Chinese tax residents “pay attention to the increasingly refined Chinese tax laws and consult with qualified tax accountants or lawyers.”

7. How much tax revenue are we talking about?

There’s no official estimate, but there are a lot of Chinese workers abroad as well as sheltered assets and income. For example, Hong Kong has granted more than 340,000 immigration visas to people from mainland China over the past five years, government figures show. Shortly before the revised tax code took effect, Boston Consulting Group estimated China’s overseas wealth at about $1 trillion.

8. What does this mean for Hong Kong and Singapore?

It could be a big blow if Chinese expats decide the reward, career boost and adventure of working abroad isn’t worth the extra costs. In Hong Kong, in particular, the developments come as many other foreign expats are considering leaving as China tightens its control of the city, leading to fears of a brain drain.

9. Doesn’t the U.S. do this?

Similar. If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. An American’s worldwide income is subject to U.S. income tax, regardless of where he or she resides.

10. Is there any way to avoid it?

Some people say they are considering moving back to China to avoid the double whammy of high living costs and high taxes. Another option would be to swap into another passport and cancel one’s Chinese household registration if a person has lived in the place long enough to qualify. Some tax experts say individuals in Hong Kong, especially those who are locally hired, can try to prove to China’s tax bureau that their residency, family ties, economic interests and long-term destinations are closer to the definition of a Hong Kong tax resident than a mainland one.

11. What about raising salaries?

Some companies may act to soften the blow by boosting salaries or bonuses, particularly for high-ranking executives. Others will have to take the hit themselves.

The Reference Shelf

• Official text of China’s individual income tax law that took effect in 2019, and the instructions for Chinese abroad issued in 2020.
• Why China’s rich are finding it harder to run from the tax collecter under the global Common Reporting Standard.
• China Briefing’s summary of what you need to know about this law if you’re a foreigner working in China.
• The Organization for Economic Cooperation and Development’s portal for automatic exchange.

©2020 Bloomberg L.P.