According to a news report, a Sino-foreign joint venture (“JV”) in Wuhan recently had to make back payments of individual income tax (“IIT”) for 54 seconded expats for the period from January 2013 to March 2014, with the total back payment amount reaching RMB 20,000,000. According to the report, this is the largest back payment the local Wuhan tax authority has ordered since 1980, when the IIT Tax Law was first promulgated.

The local tax authority in Wuhan reportedly had conducted an on-site audit of this JV last year, where it found that this JV had dozens of foreign nationals seconded from an overseas company who stayed in China for more than 183 days during the year and whose salaries were paid overseas by the JV’s foreign partner. No PRC tax had been withheld by the JV. Because the foreign nationals’ payroll data were managed by an international accounting firm without the knowledge of the JV’s financial manager, the local tax authority visited the JV more than ten times before finally obtaining the JV’s cooperation in providing the foreign nationals’ payroll. The JV then complied with the back payment order accordingly. The news report did not provide details on whether the RMB 20 million amount included interests and penalties.

While some companies in practice do not report or pay IIT for foreign nationals whose salaries are paid overseas, this practice is legally noncompliant and, as this case shows, may result in significantly liability for the PRC host company if discovered. Companies hiring foreign nationals to be seconded into China should carefully structure their employment relationship. In addition to the IIT issue mentioned in this case, companies should also consider permanent establishment / corporate tax risks for the overseas parent company, as well as employment and immigration issues that are inherent in hiring foreign nationals.