Five of China’s seven most populous cities lowered the pension insurance tax rate for employers May 1 to 16% in accordance with a national directive.
China’s cities generally have the authority to set their social tax rates and taxable wages. While the provinces and autonomous regions within which the vast majority of China’s cities are located enforce regulations with which the cities must accord regarding social tax rates and taxable wages, the cities generally have discretion regarding the exact rates and taxable wage levels they set in accordance with the provincial or regional regulations. The Office of the State Council’s directive (Chinese) for cities with an employer pension insurance tax rate higher than 16% to lower the rate to 16% was a relatively uncommon national move to influence specific rates or taxable wages.
Most of China’s cities, including five of its seven most populous cities—Beijing, Chengdu, Chongqing, Shanghai, and Tianjin—assessed on employers a pension insurance tax rate of 20% or 19% before May 1 but lowered the rate to 16%. The municipal government of Beijing affirmed the decrease to 16% in a notice (Chinese) May 5, as did the Chengdu Municipal Health Commission in a notice (Chinese) April 2. The national government issued a notice (Chinese) May 1 regarding Chongqing’s adoption of the reduced rate, a notice (Chinese) was issued May 5 by the Shanghai municipal government regarding the city’s rate reduction, and a notice (Chinese) was issued May 1 by the Tianjin Municipal Tax Service pertaining to the reduction.
Guangzhou and Shenzhen, which also are among the country’s seven most populous cities, assessed a pension insurance tax rate on employers before May 1 that was less than 16%, causing them not to have to lower the rate under the directive. Guangzhou’s pension insurance tax rate assessed on employers remains 14%, and Shenzhen’s pension insurance tax rates assessed on employers also are unchanged, with a rate of 14% based on employment income paid to employees who are residents of Shenzhen and a rate of 13% based on employment income paid to employees who are not residents of the city.
All seven of the cities also assess pension insurance tax rates on employees, but these rates were not changed May 1.
Cities that have established their minimum monthly tax base for pension insurance calculations as less than 60% of the applicable average monthly salary must increase the current percentage to 60% and may do so over a period of a few years, the national directive said. If an employee’s compensation for a month was less than the minimum monthly tax base for a type of social tax, the employee’s compensation for the month would be treated as having been the minimum monthly tax base for calculations of employee and employer tax liability for that type of social tax.
While some cities, such as Chongqing, already have a minimum monthly tax base for pension insurance equal to 60 percent of the applicable average monthly salary, Beijing is an example of a city with a lower established percentage in this regard, as its minimum monthly tax base for pension insurance is set at 40 percent of the applicable average monthly salary. Beijing, according to its May 5 notice, is to increase the percentage of the applicable average monthly salary that is used as its minimum monthly tax base for pension insurance to 46% on July 1, 2019, with a further increase to 52% July 1, 2020, and an increase to 60% July 1, 2021. Beijing’s minimum monthly tax base for unemployment insurance, which also is equivalent to 40% of the applicable average monthly salary, is to have its applicable percentage increase in the same manner as for pension insurance.
The national directive and city notices also identified that while unemployment insurance tax rates may be subject to reductions in future years, no reduction in these rates is to occur before May 1, 2020.
More information regarding payroll in China is available in Bloomberg Tax’s China Payroll Primer.