Australian Businesses Wary of New Chinese Tax Policy

Iron ore
FILE PHOTO: Workers remove the cloth covering the iron ore from Australia while they prepare for transport at a port in Tianjin municipality, China March 29, 2010.
(Photo: REUTERS/Vincent Du/File Photo)

China has recently stated that the country is considering new reforms to its taxation system. Top Chinese authorities said that this new tax policy will allow the country to easily tax offshore income of foreign employees.

This recent development has stirred quite an alarm, especially from Australian businesses. Hundreds, if not thousands, of Australian business, are currently operating in the world's second-largest economy. Should China's new tax policy come into law, many of these businesses will suffer severe repercussions.

Under China's new tax regulations, Australians, as well as other foreign workers in China that have been working in the country for more than six months each year will be required to pay tax on their offshore earnings. Among those considered as offshore earnings are investments and rental income.

Under the new tax laws, individuals, not just foreign workers, who live in China for at least 183 days, or six months, per year will be classified as a resident. This is done in for taxation purposes, a practice that is common in many countries and especially prevalent in the Western hemisphere.

The current tax law that is in effect in China stipulates that individuals have 365 days or one year before they are added to the taxation pool. This allows expatriates to "break" their residency status by simply leaving the country for at least 30 days.

These new taxation rules are part of China's revamp program of the country's taxation system. China claims that these new taxation rules will put the country's tax regulations in par with the widely accepted international standard.

One key feature of China's new tax rules is the removal of tax breaks for expatriates. This particular system was implemented several decades ago as part of the country's strategy to lure in foreign talent as the country's economy started to receive a major boom.

Azure Group partner Stephanie Liu said that China used to embrace the open door policy. However, she added, with these proposed changes the county will start to align itself with the international standard. Ms. Liu also provides advice to Australian firms operating in China.

Some observers have stated that China's new tax policy will definitely hurt the foreign firm. However, these new rules are also part of the country's effort to boost its domestic industry rather than relying heavily on foreign talent.

China is now sharing taxation information with several other countries. This was made following the country's adoption of the Common Reporting Standards which was designed in order to combat tax dodgers.

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