desmond hr director's forum

8/7/2019 Desmond HR Director's Forum

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2005 Deloitte Touche Tohmatsu

Tax planning for

PRC executives.HR Directors Forum

Speaker:

Desmond Yeung PartnerDeloitte Touche Tohmatsu Shanghai


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2005 Deloitte Touche Tohmatsu2

Agenda

Overview of tax regime in China

Regional Comparison

Tax planning ideas

Q&A


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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 morecomplex

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 theopinion of the local tax bureau; what is deemed to work in one location may

be deemed unacceptable in another.

Overview


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Progressive Tax Rates

-

50,000

100,000

150,000

200,000

250,000

RMB


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PRC Individual Income Tax

RatesMonthly exemption (PRC Citizens SH) 1,000

Monthly exemption (foreigners) 4,000

Portion of monthly taxable income Tax rate

Up to RMB500 5%

RMB501 to RMB2,000 10%

RMB2,001 to RMB5,000 15%

RMB5,001 to RMB20,000 20%

RMB20,001 to RMB40,000 25%

RMB40,001 to RMB60,000 30%

RMB60,001 to RMB80,000 35%

RMB80,001 to RMB100,000 40%

RMB100,001 and above 45%


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Agenda


Regional Comparison

Tax planning ideas

Q&A


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A

ssumptions Employee earning the equivalent of US$100,000 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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0% 50% 100%

Australia

Hong Kong

Indonesia

Malaysia

PRC (SH)

Singapore

Taiwan

Thailand

Regional Comparison

GrossTax

Social security

Net salary


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The highest taxing countries are Australia (net salary US$63,286) andIndonesia (net salary US$67,464)

The lowest taxing countries are Singapore (net salary US$91,985) and HongKong (net salary US$86,532)

Average net salary for the region is US$77,306

Shanghai is the third highest taxing country in this scenario

Regional Comparison


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Agenda


Regional Comparison

Tax planning ideas

Q&A


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Tax Planning Ideas.InterestFree Loans

Dividends

FurtherEducation

Driver

SeverancePay

OverseasMeetings

Spouse

Allowance

DirectorshipIndividualService

High

InterestAccount

BonusStructuring

11th HourIdeas


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Agenda


Regional Comparison

Tax planning ideas

Q&A


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Doing your own taxes is like performingyour own appendectomy.

Forbes Magazine


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Member ofDeloitte Touche Tohmatsu


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Interest Free Loans

Curr ently the authorities do not assess a taxable benefit arising from a low interest

rate loan

HOW DOES IT WORK?

Loan the employee at low orzero rate of interest

Eitherloan forcarorhouse purchase

HOW MUCH CAN IT SAVE?

On a loan of RMB2m it could save taxes ofup to RMB45,000 p.a.

OTHERCONSIDERATIONS

NPL syndrome unlikely, loan instalments can be withheld from earnings

Interest payable by employerto bank should be deductible


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Agenda


Regional Comparison

Tax planning ideas

Q&A


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Severance Pay

The legislation allows forbeneficial tax treatment of severance pay.

HOW DOES IT WORK?

When transferring from one legal entity to another, perhaps upon M&A, terminate the

employees contract


An employee with 5 years service history receiving a payment of RMB400,000 could save taxofRMB104,000

OTHERCONSIDERATIONS

Only practicable in limited circumstances

Ideal foremployees to be seconded

No corporate tax downside


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Overseas Meetings

Travel overseas forbusiness purposes is tax free; there are no guidelines on how to apportion acombined business/pleasure trip

HOW DOES IT WORK?

Offerto pay forstaying on in-country afterbusiness meetings

Perhaps even consideroffering a business meeting at any overseas office of the employeeschoice

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 flightscould be reimbursed tax free)

OTHERCONSIDERATIONS


Probably not attractive forfrequent travellers

More suitable forglobal companies


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Dividends

Dividends are taxed separately from earnings, dividends from an overseas entity would be subjectto tax at 20%

HOW DOES IT WORK?

Establish an overseas entity in which the executive holds shares, reroute some compensation asdividends


The tax rate differential is 25%

OTHERCONSIDERATIONS

This is a complex structure, but not uncommon

More feasible where there are a numberof seniorexecutives involved, eg partnerships

Even more beneficial forforeign executives

Corporate tax implications should be considered


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Spouse Allowance

Spouses of seniorexecutives often support theirexecutive spouses in an unpaid capacity, oftenmanaging the diary of the executive, accompanying on social functions, entertaining visitors,arranging affairs to help the executive to focus on theirduties

HOW DOES IT WORK?

The spouse is paid an allowance to recognise theirservices (the executives compensation isreduced accordingly)

The spouse is subject to tax at lowerrate bands


A monthly allowance of RMB10,000 would triggersavings ofRMB3,300 pm aftertaking intoaccount social security contributions

OTHERCONSIDERATIONS

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 fordirectors 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

P

repa

re benchma

rking data etc to s

uppo

rt the split in

rem

une

ration


Savings can be significant, an executive earning RMB1m p.a. could save up

to RMB54,000 p.a.

Superhighly paid executives can reap very high savings

Can include all seniorexecutives

OTHERCONSIDERATIONS The split between directors fees and day-to-day management earnings will

need to be supported

Complex plan but can result in significant savings


Director's fees

Monthly exemptionhigher of 800

or 20%

Up to RMB20,000 20%

RMB20,001 toRMB50,000

30%

RMB50,001 andabove

40%


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Further Education

Executives may be interested in pursuing furthereducation such as MBA.

HOW DOES IT WORK?

Simply offe

ra sala

ry sac

rifice scheme whe

reby s

uch costs a

re

reimb

ursed by thecompany


Foran educational course of US$10,000, up to US$4,500 could be saved

OTHERCONSIDERATIONS

Will help executives to develop themselves

Of limited appeal to some executives


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Individual Service

Similarto 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

othercompanies in the same group. Split the executives remuneration between earnings and

individual service fees.


Savings can be significant, an executive earning RMB1m p.a. could save up to RMB54,000

p.a.

OTHERCONSIDERATIONS

Care with documentation would be needed to support such a plan



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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 forthe executive to loan the employera lump sum, the employercan pay

interest at a high rate on this investment Anothermethod would be to make a similararrangement through a bank


A RMB1m deposit attracting interest at 10 percentage points above market rates could saveRMB25,000 p.a.

Considerhigherinterest rates; a rate of 300% could save RMB750,000 p.a.

OTHERCONSIDERATIONS

Corporate tax deductibility on the interest paid could be challenged

Not an issue if the employeris not subject to corporate taxes


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Driver

The provision of a driveris not usually regarded as a taxable benefit

HOW DOES IT WORK?

Employ a pe

rsonal d

rive

rth

ro

ugh the company


A driverearning RMB5,000 pm could result in cost savings to the executive ofRMB2,250 permonth

OTHERCONSIDERATIONS

Adds to headcount and attracts othercosts (medical insurance etc)

Employerbecomes liable fortermination costs


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Bonus Structuring

Bonuses are taxed at generous tax rates undercertain circumstances

HOW DOES IT WORK?

Redesign the executives compensation package to classify as high an amount as possible into

an annual performance bonus. Perhaps considerloans to ease the transition.


A RMB80,000 bonus can attract tax as low as RMB15,625 a saving ofRMB20,375 p.a.

OTHERCONSIDERATIONS


Potential furthersavings could be achieved through quarterly/biannual bonuses


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11th Hour Ideas

StockOptions

- New rules, exercise every month? A US$120,000 gain attracting tax of $23,425 can

be reduced to $10,500

Employing entity?

- Review entities available

Long service awards?

- 10 yearbreaks


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28Member ofDeloitte Touche Tohmatsu

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