The opening of new markets in China in the past few years has created an explosion of job opportunities and a flourishing demand for skilled expatriate workers, with latest census figures revealing a leap from 74,000 to 220,000 foreign employees between 2000 and 2011. Sending expatriates to China, however, has proven to be a headache for many multinational organisations since 2009 when the Chinese tax authorities started to treat secondment as creating a permanent establishment for the overseas employer.
With inconsistent and competing concerns related to Chinese tax, employment, immigration and foreign exchange control laws and requirements, a cross-border secondment arrangement does not come without its complications. Global law firm Baker & McKenzie explain some of the guidelines for expatriate secondments in China and provide some advice on how to tackle some of the issues companies may encounter in the process.
Taxing times
One of the biggest legal headaches for organisations seeking to bring foreign workers into China is tax, which became acute in 2009 when many local tax authorities began to treat secondment as creating a permanent establishment in China for the overseas employer, which provides taxable services to the host company through the secondee. As a result, some local tax bureaus began to levy enterprise income tax and business tax on reimbursements for salary and benefits that the Chinese host companies receiving the secondees remitted to the overseas employers.
Jinghua Liu, Tax Partner, Baker & McKenzie, Beijing explained, “Local employment in China will provide the employee with a certain amount of protection that some foreign companies may not want to give their employees and, from a tax perspective, if you do not have local employment the foreign company is considered as the employer of the expat working in China. That may create tax exposure for the foreign employer under the permanent establishment theory.”
Mounting costs
Jonathan Isaacs, an employment Special Counsel at Baker & McKenzie in Hong Kong added that in addition to rising income tax levels, foreign nationals are now required under national regulations to contribute towards China’s social insurance system, just as local Chinese employees would. He pointed out that unfortunately most expatriate workers do not benefit from this law, which was brought into play in October 2011, as they rarely choose to retire in China and many choose not to use Chinese public hospitals, where their medical costs can be covered by their medical insurance contributions.
Isaacs stressed, however, that these additional costs incurred for employers recruiting talent from overseas are not having a significant impact on hiring activity on the whole, as the skills shortage, combined with China’s burgeoning markets and thriving economy, continues to lure expatriate workers from across the globe.
New guidance
Guidance does exists to help organisations ensure that their secondment arrangements adhere to local law. The State Administration of Taxation (SAT) recently issued Bulletin 19 to provide greater certainty to multinational companies and host companies in China about how to structure cross-border secondments in a way that avoids creating a taxable establishment in China.
Liu explained that the guidance under Bulletin 19 is generally similar to the previous guidance under Notice 75— a long document that provides the interpretation of many provisions in bilateral tax treaties and provides guidance on whether the overseas employer has a permanent establishment in China under the secondment arrangement. This is determined by examining whether the overseas employer or the host company in China supervises and controls the secondee’s work in China and bears the costs and benefits that come with it. Most local tax authorities, however, have not applied the guidance under Notice 75 to secondment arrangements.
On the other hand, Bulletin 19 is a stand-alone notice focusing on secondment arrangements and provides more practical guidelines to local tax authorities. It is, therefore, more likely to be implemented at the local level.
Communication is key
Bringing foreign talent into China from overseas has always created issues for organisations, therefore ensuring that they take a holistic approach to the process is imperative. Grace Shie, Head, Global Immigration & Mobility, Greater China, Baker & McKenzie explained, “Organisations employing foreign talent into China should consider all the issues that may arise throughout the process of arranging secondments—from tax and employment through to immigration. It is imperative that all departments within the organisation maintain clear communication to ensure that they are consulting each other and working collaboratively—from the legal and finance teams through to human resources.”
Shie pointed out the new immigration entry and exit law, effective on 1 July this year, which outlines visas and work permits that apply to all employers hiring foreign workers for operations in China. She highlighted that many of the penalties have become more stringent with regard to ensuring foreign employees hold the appropriate permits, a law change that organisations should review and ensure they adhere to, in addition to Bulletin 19, to further alleviate the expat headache.
Bulletin 19 lists following specific factors that are indicative of a taxable presence:
- payments from the Chinese host company to the foreign company are in the nature of service fees or management fees;
- payments from the Chinese host company to the foreign company exceed the amount of the foreign company’s payroll costs for the secondee;
- the foreign company keeps part of the payment received from the Chinese host company rather than paying all of it to the secondee; and,
- the secondee’s individual income tax has not been fully paid in China.
Paul Arkwright
Publisher
