Tax administration in China has been undergoing some rapid changes. The efforts to streamline the government bureaucracy have worked their way to the tax bureaux, with many functions being reorganised and consolidated. The trend is towards a stronger management approach using technology more aggressively. There is greater enforcement though more audit activity and less authority for the tax officer to negotiate settlements. Many of these efforts were driven by Xiang Huaicheng, the former commissioner of the State Administration of Taxation (SAT) who was recently promoted to Minister of Finance. Revenue shortfalls resulting in large part from the slower growth of the Chinese economy have put pressure on the tax officials to speed their efforts. received tax refunds should urgently review their situation.
Tax collection drive
The State Council recently summoned all tax bureaux chiefs in China for a special meeting in Beijing which was prompted by the fact that only one-third of budgeted tax revenue has been collected in the first six months of 1998. The State Council urged the tax officials to increase collection efforts to meet the budget target by year-end. This may translate into aggressive tax collection policies and tax-payers should prepare for potentially aggressive tax audits or inspections.
Foreign insurance premiums
SAT has issued a new circular ?Guoshuifa  No. 101 ?stating that insurance premiums paid to an overseas insurer for the benefit of employees must be included in the employee's gross income whether or not the FIE claims a deduction for that amount. The circular also notes that overseas government mandated social security premiums are in principle non-deductible to the FIE and non-assessable to the employee but if those premiums are treated by the HE as an employee compensation cost, a deduction will be allowed to the FIE with the amount then being taxable to the employee. Employers should urgently review their expatriate employee insurance arrangements to assess the impact of this new circular.
Grandfather tax refund policy
Just when the five-year grandfather tax refund is near the end, the State Administration of Taxation has issued a circular ?Guoshuifa  No. 92 ?requiring local tax bureaux to re-examine eligibility for the grandfather refund on a five-year aggregate basis. In the past, foreign-invested enterprises (FIEs) established before 1994 that suffered additional turnover tax burden under the new turnover tax regime introduced in 1994 could apply for a tax refund on an annual basis. However, the SAT now says that some FIEs, especially those having significant year-to-year fluctuations in `additional tax burden', should recompute their tax refund based on an aggregate five-year basis. As a result, some tax refunds may need to be paid back.
In light of this, those FIEs which have Taxation for foreign nationals 1999 will be the first year in which foreign nationals will be subject to Chinese tax on their worldwide income. Under the PRC Individual Income Tax Law effective 1994, foreign nationals who have resided in China for more than five consecutive years are subject to income tax on a worldwide basis. There are special rules for determining whether an individual resides in China for a year. For example, if an individual is out of China for more than 90 days in aggregate or more than 30 days in one single trip in a year, the individual will not be taken to have resided in China for that year. There are also special rules for determining what constitute `days' in China.
Foreign nationals who started working in China on or before January 1, 1994 should immediately review their travelling plans and tax status in order to allow them to consider possible steps to prevent them being taxed on their world-wide income in 1999.
Paul Gillis is the senior tax partner of PricewaterhouseCoopers in China. PricewaterhouseCoopers is the largest professional services firm in China with offices in Beijing, Dalian, Guangzhou, Hong Kong, Shanghai and Shenzhen. Mr Gillis may be contacted in Beijing at +86 (10) 6505 1155 or by e-mail firstname.lastname@example.org