Tax planning for PRC executives.

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Tax planning forPRC executives.

• HR Directors Forum
• Speaker
• Desmond Yeung Partner
• Deloitte Touche Tohmatsu Shanghai

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Agenda

• Overview of tax regime in China
• Regional Comparison
• Tax planning ideas
• QA

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Overview

• For PRC Nationals, worldwide taxation applies
• Separate taxation applies (i.e. no MFJ)
• The tax regulations are often inconsistently
  applied
• As compensation structuring develops, the
  taxation aspects become more complex
• Strict withholding obligations apply and are
  robustly monitored
• Despite having a calendar tax year, most taxes
  are assessed monthly
• China tax rates are progressive
• The acceptability of any tax planning idea
  depends to a large extent on the opinion of the
  local tax bureau what is deemed to work in one
  location may be deemed unacceptable in another.

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PRC Individual Income Tax Rates
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Agenda

• Overview of tax regime in China
• Regional Comparison
• Tax planning ideas
• QA

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Assumptions

• Employee earning the equivalent of US100,000
  p.a.
• No other income or dependants
• No tax planning has been initiated
• Employee is a local of each respective territory

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Regional Comparison

• The highest taxing countries are Australia (net
  salary US63,286) and Indonesia (net salary
  US67,464)
• The lowest taxing countries are Singapore (net
  salary US91,985) and Hong Kong (net salary
  US86,532)
• Average net salary for the region is US77,306
• Shanghai is the third highest taxing country in
  this scenario

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Agenda

• Overview of tax regime in China
• Regional Comparison
• Tax planning ideas
• QA

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Tax Planning Ideas.
Interest Free Loans
11th Hour Ideas
Severance Pay
Bonus Structuring
Overseas Meetings
Dividends
Driver
High Interest Account
Spouse Allowance
Individual Service
Directorship
Further Education
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Agenda

• Overview of tax regime in China
• Regional Comparison
• Tax planning ideas
• QA

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Doing your own taxes is like performing your own
appendectomy.
Forbes Magazine
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Member of Deloitte Touche Tohmatsu
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Interest Free Loans

• Currently the authorities do not assess a taxable
  benefit arising from a low interest rate loan
• HOW DOES IT WORK?
• Loan the employee at low or zero rate of interest
• Either loan for car or house purchase
• HOW MUCH CAN IT SAVE?
• On a loan of RMB2m it could save taxes of up to
  RMB45,000 p.a.
• OTHER CONSIDERATIONS
• NPL syndrome unlikely, loan instalments can be
  withheld from earnings
• Interest payable by employer to bank should be
  deductible

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Agenda

• Overview of tax regime in China
• Regional Comparison
• Tax planning ideas
• QA

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Severance Pay

• The legislation allows for beneficial tax
  treatment of severance pay.
• HOW DOES IT WORK?
• When transferring from one legal entity to
  another, perhaps upon MA, terminate the
  employees contract
• HOW MUCH CAN IT SAVE?
• An employee with 5 years service history
  receiving a payment of RMB400,000 could save tax
  of RMB104,000
• OTHER CONSIDERATIONS
• Only practicable in limited circumstances
• Ideal for employees to be seconded
• No corporate tax downside

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Overseas Meetings

• Travel overseas for business purposes is tax
  free there are no guidelines on how to apportion
  a combined business/pleasure trip
• HOW DOES IT WORK?
• Offer to pay for staying on in-country after
  business meetings
• Perhaps even consider offering a business meeting
  at any overseas office of the employees choice
• Perhaps an annual conference in Hawaii
• HOW MUCH CAN IT SAVE ?
• On a holiday of RMB25,000 up to RMB8,000 could be
  saved (hotels and employees flights could be
  reimbursed tax free)
• OTHER CONSIDERATIONS
• No corporate tax downside
• Probably not attractive for frequent travellers
• More suitable for global companies

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Dividends

• Dividends are taxed separately from earnings,
  dividends from an overseas entity would be
  subject to tax at 20
• HOW DOES IT WORK?
• Establish an overseas entity in which the
  executive holds shares, reroute some compensation
  as dividends
• HOW MUCH CAN IT SAVE?
• The tax rate differential is 25
• OTHER CONSIDERATIONS
• This is a complex structure, but not uncommon
• More feasible where there are a number of senior
  executives involved, eg partnerships
• Even more beneficial for foreign executives
• Corporate tax implications should be considered

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Spouse Allowance

• Spouses of senior executives often support their
  executive spouses in an unpaid capacity, often
  managing the diary of the executive, accompanying
  on social functions, entertaining visitors,
  arranging affairs to help the executive to focus
  on their duties
• HOW DOES IT WORK?
• The spouse is paid an allowance to recognise
  their services (the executives compensation is
  reduced accordingly)
• The spouse is subject to tax at lower rate bands
• HOW MUCH CAN IT SAVE?
• A monthly allowance of RMB10,000 would trigger
  savings of RMB3,300 pm after taking into account
  social security contributions
• OTHER CONSIDERATIONS
• Often creates excellent goodwill from the
  supporting spouse
• Can become troublesome in the event of divorce,
  separation
• Include mistresses?

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Directorship

• The tax regulations allow for directors fees to
  be taxed rates as shown.
• HOW DOES IT WORK?
• Appoint executives to the Board of Directors
• Detail qualifying directorial duties in separate
  contracts
• Prepare benchmarking data etc to support the
  split in remuneration
• HOW MUCH CAN IT SAVE?
• Savings can be significant, an executive earning
  RMB1m p.a. could save up to RMB54,000 p.a.
• Super highly paid executives can reap very high
  savings
• Can include all senior executives
• OTHER CONSIDERATIONS
• The split between directors fees and day-to-day
  management earnings will need to be supported
• Complex plan but can result in significant
  savings
• No corporate tax downside

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Further Education

• Executives may be interested in pursuing further
  education such as MBA.
• HOW DOES IT WORK?
• Simply offer a salary sacrifice scheme whereby
  such costs are reimbursed by the company
• HOW MUCH CAN IT SAVE?
• For an educational course of US10,000, up to
  US4,500 could be saved
• OTHER CONSIDERATIONS
• Will help executives to develop themselves
• Of limited appeal to some executives

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Individual Service

• Similar to directors fees, income from
  individual service is taxed at separate rates
• HOW DOES IT WORK?
• Identify a part of the executives duties that
  could be provided on a freelance basis, perhaps
  to other companies in the same group. Split the
  executives remuneration between earnings and
  individual service fees.
• HOW MUCH CAN IT SAVE?
• Savings can be significant, an executive earning
  RMB1m p.a. could save up to RMB54,000 p.a.
• OTHER CONSIDERATIONS
• Care with documentation would be needed to
  support such a plan
• No corporate tax downside

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High Interest Account

• Interest received by an individual is taxed at
  just 20
• HOW DOES IT WORK?
• One method would be for the executive to loan the
  employer a lump sum, the employer can pay
  interest at a high rate on this investment
• Another method would be to make a similar
  arrangement through a bank
• HOW MUCH CAN IT SAVE?
• A RMB1m deposit attracting interest at 10
  percentage points above market rates could save
  RMB25,000 p.a.
• Consider higher interest rates a rate of 300
  could save RMB750,000 p.a.
• OTHER CONSIDERATIONS
• Corporate tax deductibility on the interest paid
  could be challenged
• Not an issue if the employer is not subject to
  corporate taxes

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Driver

• The provision of a driver is not usually regarded
  as a taxable benefit
• HOW DOES IT WORK?
• Employ a personal driver through the company
• HOW MUCH CAN IT SAVE?
• A driver earning RMB5,000 pm could result in cost
  savings to the executive of RMB2,250 per month
• OTHER CONSIDERATIONS
• Adds to headcount and attracts other costs
  (medical insurance etc)
• Employer becomes liable for termination costs

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Bonus Structuring

• Bonuses are taxed at generous tax rates under
  certain circumstances
• HOW DOES IT WORK?
• Redesign the executives compensation package to
  classify as high an amount as possible into an
  annual performance bonus. Perhaps consider loans
  to ease the transition.
• HOW MUCH CAN IT SAVE?
• A RMB80,000 bonus can attract tax as low as
  RMB15,625 a saving of RMB20,375 p.a.
• OTHER CONSIDERATIONS
• No corporate tax downside
• Potential further savings could be achieved
  through quarterly/biannual bonuses

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11th Hour Ideas

• Stock Options
• New rules, exercise every month? A US120,000
  gain attracting tax of 23,425 can be reduced to
  10,500
• Employing entity?
• Review entities available
• Long service awards?
• 10 year breaks

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Member of Deloitte Touche Tohmatsu