DISCLAIMER: The following provides some loose interpretation of the tax laws in China and in the US…I’m not a tax attorney…I’m just a schmuck living in China who is trying to learn how things work. I will not be responsible for any decisions you make based upon the information on this site. Get an attorney and/or accountant to answer the specifics.
In my time here, I’ve encountered a large number of expatriate workers who have “creative” arrangements with their compensation. Here are a most of the arrangements I’ve heard of….
1. Local Employer - Salary is paid by a employer (or local subsidiary of an overseas company) in China (not really creative…just standard).
2. Overseas Employer - Salary is paid by an employer in their home country into their home bank and uses ATM and wire transfers.
3. Subsidiary + Overseas Employer Hybrid - Employee is assigned to an paid by a local subsidiary, but also receives deposits in their home country bank account by their emplyer in their home country to cover their expenses while they are away. This also keeps an employee’s insurance and benefits in tact.
4. Sponsored - An overseas company or organization transfers money to the employee’s Chinese employer to fully pay or augment the employee’s paycheck.
5. Different Domestic - Employee receives compensation from a domestic company that is unrelated to your local employer.
If you work in China and are paid in the US…regardless of whether the money reaches you in China, you are (technically) required to pay taxes in China for that income. That means, if you design a website for a friend and he credits your Paypal account….guess what? You are liable for taxes in China and should be going down to the tax office to pay taxes on that money. That’s right…if you do work for someone in the US and are paid in the US but are physically in China when you do it….you must pay Chinese taxes. And to make things interesting, you pay each month.
Now, let’s take it up a notch and say that some US company puts you on their payroll while you are in China…even for a tiny, part-time salary in exchange for your availability at trade shows around the world, remote work, writing, etc. You guessed it…you must pay taxes.
What do they tax?
Sorry, but that matching payment to your 401k isn’t exempt here. If a dollar value hit’s your bottom line, they tax it here.
What about my US taxes
Well finally Uncle Sam gives you a break because double taxation puts you at a disadvantage to locals in the host country. Appaerently, you are free and clear up to $80k that you earn in a foreign country. I will address this issue later because I’m not certain if you get a tax credit for foreign taxes paid on amounts higher than $80k or not. I’ve just been told that a person can stop withholding taxes from their local paycheck if they are in another country. Consult a good tax attorney for the details.
“But gee, there is no record of this company because my visa was arranged through the local company. How would China know I have any relationship with any other company?”
Realistically , they probably wouldn’t…especially if you are making tax payments on your local income. (note: I am not advocating that you break the law in China). The authorities here would first need to have a reason to suspect this, followed by an expensive process of finding out what the numbers are…it just wouldn’t be worth their time unless you were pulling in some serious greenbacks. No matter what, they would make your life hell over this.
But let’s say that the company paying you domestically is a multinational corporation doing business in China eventhough you are being employed in China (including visa sponsorship) by a completely different entity. Again, it might be difficult for you to be caught because there is no record of your relationship with that company in your home country. BUT here’s the catch - Along with making your life hell, they could go after the local subsidiary and assess a huge fine and/or affect your company’s ability to business in China. Therefore, a savvy multinational corporation will usually hire a tax attorney and a local accounting firm in China to ensure that your taxes are being paid on monies you are paid by them anywhere else in the world.
What about a short business trip on a 30 day work visa?
The company who invited you in is liable for your tax payment and it’s being enforced now because of the link between the immigration and tax systems.
Penalties
Now, what happens if you are caught failing to pay taxes here? The penalty is 3x the tax bill + interest. So $4000 income in a month = $1800 taxes x 3 = $5400 + interest. Definitely not small change and definitely not worth the risk.
This is my first stab at understanding the tax system here. There are a lot myths and misinformation around this because people instinctively want to avoid taxes, and let’s face it, it’s easier to do that when you are an expat in a foreign country. It’s compounded when the country can’t provide drinkable water or clean air…it just makes you angry. But this is a developing nation and by China standards, we are sort of wealthy (as someone on a teaching package can be) and in all societies, the wealthy do not (usually) utilize the services that their taxes pay for but rather gain benefit from the social stability it provides.
