As the Chinese government continues to open its doors to foreign business, more multinational companies have established a presence in China and the culture has changed dramatically. Companies now understand the importance and value of human capital. What were previously small and separate personnel departments have evolved into multi-faceted human resource departments where the payroll function is playing an increasingly important role.
However, payroll is a relatively new concept in China, rules are not consistently enforced, and there are many hidden complexities. The salary calculation conforms to relatively simple rules, but the management of social benefits is a world apart where each employee must be considered individually. Employees’ social benefits require significant administrative efforts in the Chinese payroll production process. Companies must calculate contributions, then report and pay them to a large number of local insurance bureaus scattered across the country whose policies differ by location.
Unlike practitioners in developed western countries, there is no requirement for local practitioners to be credentialed payroll professionals. Many payroll employees are learning on the job, figuring things out as challenges arise, and adapting in response to lessons learned often painful lessons in the form of penalties from local government agencies. Companies are learning that payroll is not only about the numbers; Payroll processes must comply with all government regulations with regard to taxes, benefits, and employee protections. Missteps result in financial costs to employers but can also negatively impact a company’s image and reputation in the local market.
Understanding and complying with complex labor laws is critical to the continued growth and success of corporations doing business in China. Senior management teams of these multinational companies identify a handful of topics that are of particular importance and that require local payroll expertise to adhere to. Some of the most frequently observed challenges are explained below.
Variable Interpretations of Government Tax Policy
Tax laws in China are interpreted differently by individual tax authorities. A local tax authority has the ability to set the rules for how things should work in their province. This means that for any given issue, tax rules may vary from city to city.
Given the inherent complexities of global payroll tax regulations and the additional intricacies in China, a local consultant with regional experience provides critical expertise to multinational companies doing business in China. For example, our China-based STG consultants work directly with senior leadership to ensure they clearly comprehend the implications of non-compliance. In some cases, a local payroll vendor’s interpretation of a law or tax and how they set it up might be very different from how the company wants to treat it. Part of STG’s role in this scenario is to advise the company that the payroll vendor has correctly implemented the tax code. In cases where this expertise does not exist, companies often create non-compliant systems. They risk an audit from the government revenue office and, in cases where non-compliance is discovered, they face a retroactive penalty: a surcharge that is multiplied out by the number of years the discrepancy has existed.
“Payroll is a relatively new concept in China, rules are not consistently enforced, and there are many hidden complexities.”
– By Senior Payroll Consultant, APAC region, Spencer Thomas Group
Individual Income Taxes
As multinational business opportunities have increased in China, tax regulations and systems have evolved to keep up with the changing landscape. Employers are now responsible for providing an annual tax statement to employees and different tax thresholds have been established for local employees vs. green card holders or foreign passport holders. But this change has also led to additional complexities for HR and payroll providers. For instance, the way earnings are categorized influences the way taxes are applied. There is a special tax treatment for performance-based annual bonuses and employees are allowed to enjoy those benefits one time per year. This can be especially disadvantageous to employees if the amount of their bonus will bump them into a higher tax bracket. In these cases, neither the employer nor the employee is allowed to manipulate the bonus amount or the payout timeframe to avoid the increased tax implication of the higher tax bracket.
Taxes on Insurance
In China, commercial benefits are considered income and are therefore taxed as such. Employer-sponsored health benefits, for example, are treated as taxable income. The particulars of whether the employee or employer pays those taxes are at the discretion of individual companies. Whoever is responsible for payroll whether in-house or vendor can incur large penalties if those taxes are not accurately accounted and paid for.
Additional complexities exist due to the variety of social insurance programs and associated costs throughout the country.
Other HR Complexities
China’s labor laws are meant to be very protective of employees. This results in attractive compensation and protection, but also results in additional complexities.
Statutory Annual Leave – The government mandates a certain number of days off per year that an employer must offer an employee. The number of days guaranteed to an employee is based on how long he or she has been in the workforce and paying into the social system, and therefore is not employer or position dependent. If an employee leaves a company prior to taking any of the given year’s leave, the company is responsible to pay the employee the monetary equivalent upon his or her departure. In such a case, the mandatory leave obligation would be split between an employee’s existing employer and the new employer at a rate comparable to the portion of the year worked at each company.
Overtime Compensation is Tied to China’s Working Hour System – There are three types of working hour systems in China: Standard Working Hour System, Flexible Working Hour System, and Comprehensive Working Hour System. If employees are employed under the Standard Working Hour system, they are entitled to be paid overtime for any non-planned work outside of their regular schedule. If employees are employed under the Flexible Working Hour system, they are not entitled to additional pay for any early or late hours worked with the exception of hours worked on public holidays. The latter system is clearly more advantageous to employers and they must obtain local government approval to implement a Flexible Working Hour system.
Tax and Payroll Regulation and Compliance in China Remains Complex and Nuanced by Location – Success in this region requires multinational companies to rely on local payroll experts. Spencer Thomas Group has experts on the ground in China who possess both international payroll experience and local payroll knowledge essential to helping clients deliver safe, compliant, standard and risk reduced payroll products.