Posted on Feb 16, 2016 by Rob McBroom
Benjamin Franklin once said, "In this world nothing can be said to be certain, except death and taxes;" a saying which you will find true regardless of where you live. For many expats either living in or considering moving to China, taxes can be one of the more complicated aspects of living in the country, especially when it comes to filing taxes and figuring out just how much you owe.
China, as with many other countries has been constantly introducing tweaks and changes to the taxation system in order to make it more efficient, or to promote other sectors. One of the most recently introduced changes is a new pilot program that is set to promote the purchase of private health insurance while also offering a rebate on an individual's income tax.
The general concept of the pilot income tax rebate policy
China's new pilot program, officially referred to as an Individual Income Tax (IIT) policy for commercial health insurance, is a new pilot policy jointly launched by the The Ministry of Finance, State Administration of Taxation, and the China Insurance Regulatory Commission together on January 1, 2016. It applies to 31 cities in the country including Shanghai, Beijing and Chongqing.
The main idea of this policy is that any person living in the 31 cities included in the pilot who secures a specific type of health insurance in China will be allowed to deduct RMB 2,400 from their annual taxable income. As this is a pilot policy there are some important things you should be aware of, including what health insurance policies qualify, who is eligible to use the deduction, and what this means for the future of the health insurance industry in China. In order to clarify this, we have written this short guide.
Which health insurance policies qualify for this pilot
As the name of the plan suggests the main type of health insurance plans included in this policy are 'commercial' in nature. What the government means by this is plans that are not offered via the government, but are instead sold by private health insurance providers in China. Of the commercial health insurance products available, there are a number of conditions that need to be met in order for a plan to be considered as part of this scheme. The most important include:
- Plans need to provide universal health coverage. According to a circular from KPMG 'universal coverage' is comprised of "a medical insurance component and a personal accumulation account." The personal accumulation account will be managed by the insurer and appear to be primarily for the covering of health insurance and care after retirement.
- The insured must be over the age of 16, and under the mandatory retirement age. From the documentation we have been provided, it would appear that in order to qualify for this reduction in taxes, the whole group insured needs to be over the age of 16 and paying Individual Income Tax.
- Pre-existing conditions need to be covered.
- Renewal of the plan needs to be ensured.
- The plan should be designed to cover personal medical expenses stemming from out-of-pocket payments made due to excesses of basic and supplementary medical insurance, or for care that is not covered by the basic plans.
Who is eligible for the rebate
Due to the requirements set out by the three governing bodies not every person residing in China will be eligible for this scheme. Obviously, those who are not living in the 31 cities will be excluded, at least until the end of the pilot period. People who are under the age of 16 and over the retirement age will also be excluded. Beyond that, the major determiner of whether you will be eligible for the income tax rebate is if you are currently earning an income.
The government has further broken the eligible income earners down into three provisions each with a different way the Individual Income Tax deduction is applied. The three provisions are:
- Individuals with salaries or wages who purchase their own insurance plan - You will need to provide your withholding agent with proof that you have secured a compliant plan. Once the documents are provided you will be able to deduct RMB 200 from your monthly taxable income, for a total of RMB 2,400 deducted in one year.
- Individuals with a compliant plan that is provided by their employer - The employer is required to record the health insurance premium as an employee's income. This expenditure can then be deducted from the employee's monthly income at a maximum of RMB 200 a month. In other words, the products will be deemed to be purchased by you, with the company purchasing on your behalf.
- Self-employed individuals, contractors who work for enterprise or public institutions, or individual business owners - If you have a compliant plan you can deduct up to RMB 2,400 from your taxable income for Individual Income Tax purposes. Note: you will not be able to deduct from business income, this has to be applied only to personal income.
What does this mean for the future
Because this is a pilot policy you can probably expect that there will be tweaks to the policy when, or even if, it is rolled out nationwide. The experts at Pacific Prime China believe that this will be a fairly popular policy, so it is a fairly certain to move beyond the pilot stage.
As such, you can expect to see larger insurers offering compliant plans, or even adapting existing offerings so that they are compliant. If you are interested in learning more about this and how health insurance can influence your income tax, schedule a meeting with our experts today.