News Flash. China Tax and Business Advisory. Foreign employees required to make social security contributions in China. October 2011 Issue 27

Transcription

1 News Flash China Tax and Business Advisory October 2011 Issue 27 Our International Assignment Services Team Contacts Mandy Kwok Tel: Edmund Yang Tel: +86 (10) Stacy Kwok Tel: +86 (21) Jacky Chu Tel: Our International Assignment Services / Human Resources Services team offers comprehensive solutions that help clients maximise business value from international assignments - bringing organisations to the leading edge of business performance. We specialise in international assignments management, expatriate tax compliance and advisory, tax & assignment policy review and design, regional health check, expatriate compensation and benefits design and global visa services. Foreign employees required to make social security contributions in China The China Social Security Law ( the SS Law ) and its Implementation Measures which took effect on 1 July 2011 introduced a national framework with an aim to standardise and strengthen the social security scheme administered by local governments for Chinese employees as well as their employers in China. The Chinese social security scheme covers five types of social security contributions, namely pension, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance. To follow international practice and protect the legitimate rights and interests of foreign employees working in China, the SS Law has stated that foreign employees should also participate in the social security scheme. In June 2011, the Ministry of Human Resources and Social Security ( MHRSS ) released the draft Provisional Measures on the Participation in the Social Security Scheme by Foreign Employees Working in China ( the Provisional Measures ) for public consultation, which clarified the uncertainty brought about by the SS Law on how foreign employees would be affected. The draft Provisional Measures have stirred up widespread concerns on how foreign employees could in practice enjoy the social security benefits after making their contributions. Upon the public comments collected, the MHRSS finalized the Provisional Measures 1, which will take effect on 15 October Please refer to the Appendix for our unofficial translation of the Provisional Measures.

2 In this News Flash, we would share with you the key areas of the Chinese social security scheme relevant to foreign employees and our observations. Salient points We summarise the key implications for foreign employees participating in the Chinese social security scheme as follows: Foreigners who are employed by Chinese companies directly or assigned by foreign employers to work in their Chinese subsidiaries, branch offices or representative offices and who have legally obtained work permits, resident permits or permanent resident permits in China shall participate in the Chinese social security scheme. At the same time, their Chinese employers or China host entities should make their respective employer s portion of the social security contributions. Chinese employers or China host entities should register their foreign employees for social security purpose within 30 days after applying for their work permits. Foreign employees participating in the social security scheme will receive social security cards and enjoy benefits similar to those of local Chinese employees. For example, after they leave China upon completion of their employment, the number of years of pension contribution made by them can be aggregated if they return to work in China again. Also, foreign employees are entitled to monthly pension payments after retirement if certain criteria (i.e., minimum contribution years) are satisfied, or withdraw the cumulative balance of their individual social security account upon written application if they leave China before reaching the prescribed retirement age for collecting pension payment. Foreign employees from countries which have entered into Totalisation Agreements with China may be exempted from certain Chinese social security contributions in accordance with the specific coverage of the relevant Agreements. Currently, China has only entered into Totalisation Agreements with the Federal Republic of Germany ( Germany ) (for pension and unemployment) and the Republic of Korea ( South Korea ) (for pension). The Provisional Measures require local labour bureaus (which issue work permits to foreign employees) and local social security bureau to establish timely and regular communication to monitor the compliant status of social security contributions of foreign employees. Non-compliance in social security contributions or work permit application may attract penalty under the relevant social security and foreign employment regulations. PwC observations Details in local rules The Provisional Measures provide general guidance for foreign employees participating in the Chinese social security scheme. Detailed local implementation, such as contribution rates and base as well as administrative procedures, may vary highly dependent on local rules issued by local governments and their enforcement. At the time of preparing this News Flash, we understand that most of local social security bureaus are still developing their local rules. Effective date As the SS Law states that foreign employees should participate in the Chinese social security scheme from 1 July 2011 while the effective date of the Provisional Measures is 15 October 2011, it remains to be seen whether or not social security contributions for the period from 1 July to 14 October 2011 are required. This may eventually be subject to the local social security bureaus interpretation. For instance, we understand that one local social security bureau in southern China has taken the position that foreign employees and their Chinese employers should make contributions from 1 July News Flash China Tax and Business Advisory 2

3 Financial impact to employees and employers We set out below an illustration of social security contribution costs to foreign employees and their Chinese employers based on the current contribution rates and base in Beijing and Guangzhou for your easy reference. City Beijing Shanghai Guangzhou SS items Employee Employer Employee Employer Employee Employer Pension 8% 20% 8% 22% 8% 12% Medical 2% + RMB3 10% 2% 12% 2% 8% Unemployment 0.2% 1% 1% 1.7% 1% 2% Maternity 0% 0.8% 0% 0.8% 0% 0.85% Work-related injury 0% 0.3% - 1% 0% 0.5% 0% 0.5% - 1.5% Total 10.2% % % - 11% 37% 11% RMB3 32.8% 24.35% Ceiling for 2011 monthly salary base for contribution (RMB) 12,603 11,688 13,623 Maximum monthly contribution (RMB) 1,289 4,046 4,134 1,286 4,325 1,499 3,181-3,317 As the majority of foreign employees monthly salary generally exceeds the above local salary ceilings, the employer s and employee s combined contribution cost would be around RMB5,600 per month for, say, a foreign employee working in Shanghai. From a tax perspective, social security contributions made by the foreign employees in accordance with the SS Law are deductible for Chinese Individual Income Tax ( IIT ) purposes. In addition, in accordance with the prevailing IIT Law and regulations, no IIT shall be imposed when the individual receives monthly pension payment. While it could be argued that the proceeds, which could be withdrawn by foreign employees from their cumulative balance of their individual pension accounts when they leave China before reaching the prescribed retirement age, should also be exempt from IIT, it remains to be seen whether such interpretation would be agreed by the local tax bureaus. Further, the employer s contribution is exempted from IIT and such cost would be deductible by the employer for Chinese Corporate Income Tax purposes. What benefits could foreign employees enjoy? While the Provisional Measures state that foreign employees participating in the Chinese social security scheme should be entitled to benefits similar to those enjoyed by local Chinese, it does not elaborate on how they could enjoy the benefits except for pension. As a reference, a qualified local Chinese employee in Shanghai who retired in year 2010 could receive a pension payment of around RMB2,000 per month. Such level of pension payment may not be very attractive to most foreign employees especially when comparing to the amount of pension benefits in their home countries. However, the benefits in relation to contributions to other four social security items are not clear for the time being. For example, foreign employees who become unemployed would usually have to leave China once the work permit is cancelled. Then they should not be eligible to claim the unemployment insurance in this circumstance. Therefore, there are concerns as to why foreign employees and their employers in China are required to make contribution to unemployment insurance. It is necessary to understand the corresponding details under the local implementation rules in this regard. Protection under Totalisation Agreements China has only entered into Totalisation Agreements with Germany and South Korea at present. It is therefore expected that more countries would conclude Totalisation Agreements (Germany and South Korea may also want to expand the scope of their current Totalisation Agreements) with China to relieve their residents from Chinese social security obligations. However, it would be important to understand how the local social security bureaus would deal with implementation of the Totalisation Agreement. News Flash China Tax and Business Advisory 3

4 Impact on residents of Taiwan, Hong Kong and Macau In the draft Provisional Measures, there was an article stating that these residents working in China should participate in the social security scheme. However, that article was removed from the final Provisional Measures. It is uncertain whether the removal of that article would imply that these residents would be exempted from making such social security contributions or it is not necessary for them to apply the Provisional Measures. This might be because there is a circular Order [2005] No previously issued by the MHRSS, which clarifies that these residents are required to participate in the Chinese social security scheme if they are employed by an entity in China. It is possible that the MHRSS (or its local social security bureaus) would issue a separate set of guideline clarifying this issue in due course. Conclusion According to the November 2010 official statistics of the Chinese government, there were 1.2 million expatriates (600,000 foreigners, 230,000 Hong Kong residents, 20,000 Macau residents and 170,000 Taiwanese) living in China for three months or more. Therefore, the development of this new China social security contribution requirement for foreign employees working in China has certainly attracted a lot of attention by foreign governments, business chambers and companies with substantial investment and foreign employees in China. Employers and foreign employees working in China should ensure that they comply with the latest local social security rules and practices to avoid any penalty on non-compliance. 2 The Order [2005] No.26, titled the Administrative Measures for Employment of Residents of Taiwan, Hong Kong and Macau in China, was issued by the Ministry of Labor and Social Security, the predecessor of the MHRSS on 14 June This circular is still valid as of now, providing detailed administration guidelines for the employment of these residents in China, including scope of application, application requirements, and participation in the social security scheme, etc. News Flash China Tax and Business Advisory 4

5 Appendix [This unofficial English translation is prepared by PwC China on 12 October In the case that the unofficial English translation conflicts with the content in the original Notice in Chinese, the Notice in Chinese shall prevail.] Promulgation of <Provisional Measures on the Participation in the Social Security Scheme by Foreign Employees Working in China > Ministry of Human Resource and Social Security Order [2011] No.16 6 September 2011 In order to protect the legitimate rights and interests of foreign employees working in China in their participation in the social security scheme and their entitlement to social security benefits and to strengthen the administration of social security, the Ministry of Human Resource and Social Security (thereinafter referred to as the Ministry or MHRSS ) prepared the <Provisional Measures on the Participation in the Social Security Scheme by Foreign Employees Working in China> (thereinafter referred to as the Provisional Measures ) in accordance with the <Social Security Law of People s Republic of China> (thereinafter referred to as the Social Security Law ). The Provisional Measures was reviewed and passed by the 67th board meeting of the Ministry and was endorsed by the State Council for promulgation. The Provisional Measures shall take effect from 15 October Weimin YIN, Minister of the MHRSS Provisional Measures on the Participation in the Social Security Scheme by Foreign Employees Working in China Article 1 In order to protect the legitimate rights and interests of foreign employees working in China in their participation in the social security scheme and the entitlement to social security benefits and to strengthen the administration of social security, the Provisional Measures is prepared in accordance with the Social Security Law. Article 2 A foreign employee working in China refers to a non-chinese citizen who is legally employed in China with a legal working permit such as the <Foreigner Employment Permit>, the <Foreign Expert Permit> and the <Foreign Resident Correspondent Permit> and legal documents for staying in China, as well as holds a <Permanent Residence Certificate for Foreigners>. Article 3 A foreigner employed by an enterprise, a public institution, a non-governmental organization, a privatelyowned non-enterprise entity, a foundation, a law firm, an accounting firm or any other entity that is registered in accordance with the domestic laws in China (hereinafter referred to as the Employer ), is required to participate in the following social security scheme: basic pension, basic medical insurance, work-related injury insurance, unemployment insurance and maternity insurance. The foreigner employee and his/her employer shall make social security contributions in accordance with relevant regulations respectively. A foreigner who are assigned to work in a branch or a representative office registered in China (hereinafter referred to as the Local Employer in China ) after he/she enters into an employment contract with a foreign employer, is also required to participate in the social security scheme, including the basic pension, basic medical insurance, work-related injury insurance, unemployment insurance and maternity insurance, in accordance with the relevant law. The foreigner and his/her Local Employer in China shall make social security contributions in accordance with relevant regulations. Article 4 An Employer who employs a foreigner shall register for social security purpose within 30 days after it applies for a working permit for the employee in China. For a foreigner who is assigned by his/her foreign employer to work for a Local Employer in China, the Local Employer in China shall register the foreign employee for social security purpose. News Flash China Tax and Business Advisory 5

6 The competent authority in charge of issuing the working permit to a foreigner shall report the information of the foreigner to the local social security agency in due course. The local social security agency shall regularly and proactively enquire relevant authorities regarding information on issuing working permit to foreigners. Article 5 A foreigner who participates in the social security scheme is eligible to the social security benefits when relevant conditions are met. The individual pension account of a foreigner is preserved when he/she leaves China before he/she reaches the age qualified for the pension benefits. The number of years of pension contribution by a foreigner will be aggregated once he/she returns to work in China. In this situation, the foreign can also apply in writing to terminate the social security account and to withdraw the cumulative balance of an individual social security account in one lump sum. Article 6 Upon the foreigner s death, the balance in his or her individual social security account can be inherited according to the law. Article 7 A foreigner who claims the monthly social security benefits overseas shall produce, at least once every year, to the social security agency in-charge of payment evidence that he/she is still alive. The evidence can be a certificate issued by a Chinese embassy or consulate, or a certificate notarized by a relevant competent authority in his/her home country and authenticated by a Chinese embassy or consulate. A foreigner who legally enters into China can present at the authority social security agency in-charge of payment to prove that he/she is still alive. Then it will not be necessary for him/her to provide the evidence prescribed in the preceding paragraph. Article 8 Where a foreigner who participates in the social security scheme in accordance with the law has disputes with his/her Employer or Local Employer in China with respect to social security matters, he/she may apply for mediation, arbitration and litigation in accordance with the law. Where the Employer or the Local Employer in China has infringed the foreigner s social security benefits, the foreigner can request the administration authority of social security or the collection authority of social security to deal with the infringement according to the law. Article 9 A foreigner who is the national of a country that has concluded a bilateral or multilateral totalisation agreement with China shall follow the relevant agreement in his/her participation in the social security scheme. Article 10 The in-charge social security authority shall assign a social security number and issue a social security card to a foreigner pursuant to the <Rules for Social Security Number for Foreigners>. Article 11 The administration authority of social security shall monitor and inspect foreigners participation in the social security scheme in accordance with the provisions of the Social Security Law. Where the Employers or the Local Employers in China fail to register a foreigner working in China for social security purpose or fail to make social security contribution in accordance with the Social Security Law, they shall be treated in accordance with the Social Security Law, <Regulation on Labor Security Supervision> and relevant laws and administrative regulations. Where an Employer hires a foreigner who fails to apply for and obtain working permit or who does not hold a Permanent Residence Certificate for Foreigners, the Employer shall be treated in accordance with the <Administrative Rules for Foreigners Working in China>. Article 12 The Provisional Measures shall take effect from 15th October The appendix, <Rules for Social Security Number for Foreigners>, is omitted. News Flash China Tax and Business Advisory 6

7 In the context of this News Flash, China, Mainland China or the PRC refers to the People s Republic of China but excludes Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan Region. The information contained in this publication is for general guidance on matters of interest only and is not meant to be comprehensive. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual PricewaterhouseCoopers client service team or your other tax advisers. The materials contained in this publication were assembled on 12 October 2011 and were based on the law enforceable and information available at that time. To make enquiries about our China tax and business advisory services, please feel free to contact the following lead specialist partners: Financial Services Matthew Wong Tel: +86 (21) matthew.mf.wong@cn.pwc.com Transfer Pricing Spencer Chong Tel: +86 (21) spencer.chong@cn.pwc.com Indirect Tax Alan Wu Tel: +86 (10) alan.wu@cn.pwc.com Mergers & Acquisitions Danny Po Tel: danny.po@hk.pwc.com China Business & Investment Advisory Anthea Wong Tel: +86 (10) anthea.wong@cn.pwc.com International Tax Services Edwin Wong Tel: +86 (10) edwin.wong@cn.pwc.com Domestic Enterprises Tax Services Elton Huang Tel: +86 (21) elton.huang@cn.pwc.com Customs & International Trade Damon Paling Tel: +86 (21) damon.ross.paling@cn.pwc.com Registration & Corporate Compliance Matthew Wong Tel: +86 (21) matthew.mf.wong@cn.pwc.com Tax Accounting Services Terry Tam Tel: +86 (21) terry.sy.tam@cn.pwc.com Value Chain Transformation Steven Tseng Tel: +86 (21) steven.tseng@cn.pwc.com Tax Controversy Services Xiaoying Chen Tel: +86 (10) xiaoying.chen@cn.pwc.com International Assignment Services / Human Resources Services Northern Region Edmund Yang Tel: +86 (10) edmund.yang@cn.pwc.com Central Region Stacy Kwok Tel: +86 (21) stacy.kwok@cn.pwc.com Southern Region Jacky Chu Tel: jacky.chu@hk.pwc.com Our regional contacts: Beijing Edward Shum Tel: +86 (10) edward.shum@cn.pwc.com Chongqing Robert Li Tel: +86 (23) robert.li@cn.pwc.com Dalian Rex Chan Tel: +86 (411) rex.c.chan@cn.pwc.com Guangzhou Daisy Kwun Tel: +86 (20) daisy.kwun@cn.pwc.com Hong Kong Charles Lee Tel: charles.lee@cn.pwc.com Macao Pat Wong Tel: pat.lk.wong@hk.pwc.com Nanjing Jane Wang Tel: +86 (25) jane.y.wang@cn.pwc.com Ningbo Amy Cai Tel: +86 (574) amy.cai@cn.pwc.com Qingdao Steven Wong Tel: +86 (532) steven.wong@cn.pwc.com Shanghai Peter Ng Tel: +86 (21) peter.ng@cn.pwc.com Shenzhen Charles Lee Tel: +86 (755) charles.lee@cn.pwc.com Singapore Lennon Lee Tel: lennon.kl.lee@sg.pwc.com Suzhou Linjun Shen Tel: +86 (512) linjun.shen@cn.pwc.com Taiwan Steven Go Tel: +886 (2) steven.go@tw.pwc.com Tianjin Kelvin Lee Tel: +86 (22) kelvin.lee@cn.pwc.com Xiamen Charles Lee Tel: +86 (592) charles.lee@cn.pwc.com Xian Elton Huang Tel: +86 (29) elton.huang@cn.pwc.com This China Tax and Business News Flash is issued by the PwC TAX Knowledge Management Centre in China and Hong Kong, which comprises of a team of experienced professionals dedicated to monitoring, studying and analysing the existing and evolving policies in taxation and other business regulations in China, Hong Kong, Singapore and Taiwan. They support the PricewaterhouseCoopers partners and staff in their provision of quality professional services to businesses and maintain thought-leadership by sharing knowledge with the relevant tax and other regulatory authorities, academies, business communities, professionals and other interested parties. For more information, please contact: Matthew Mui Tel: +86 (10) matthew.mui@cn.pwc.com Please visit PricewaterhouseCoopers websites at (China Home) or (Hong Kong Home) for practical insights and professional solutions to current and emerging business issues PricewaterhouseCoopers Consultants (Shenzhen) Ltd. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Consultants (Shenzhen) Ltd. which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.