On 20 July 2018, the General Office of the CPC Central Committee and the General Office of the PRC State Council issued the Reform Plan of the State Tax and Local Tax Collection Administration System (Reform Plan), the purpose of which is to improve the efficiency of the administrative mechanism for the collection of social insurance contributions. The Reform Plan provides that social insurance contributions shall be collected by tax authorities in a centralised manner at a nationwide level starting from 1 January 2019. The Reform Plan, which is likely to bring significant impact to labour cost management and planning of enterprises in Mainland China (PRC), is another revolutionary reform by the PRC government after the merger of state tax authorities and local tax authorities at the national and local levels.
Existing modes of collection of social insurance contributions
Currently, social insurance contributions are collected under two main regimes, namely, the “Collection by Social Insurance Agencies” regime and the “Collection by Tax Authorities” regime:
- Under the Collection by Social Insurance Agencies regime, social insurance administrative agencies are responsible for both the assessment and collection of social insurance contributions. This mode of collection is adopted in provinces and cities such as Beijing, Shanghai and Tianjin.
- Under the Collection by Tax Authorities regime, social insurance contributions are collected by tax authorities. Examples of provinces and cities which adopt this regime include Henan, Hebei, Jiangsu and Zhejiang. This collection regime can be further classified into:
- “Assessment by Social Insurance Agencies, Collection by Tax Authorities”, under which social insurance contributions are assessed by social insurance administrative agencies and collected by tax authorities; and
- “Assessment and Collection by Tax Authorities”, under which tax authorities are responsible for both the assessment and collection of social insurance contributions.
Most regions in the PRC adopt the Collection by Social Insurance Agencies regime or the Assessment by Social Insurance Agencies, Collection by Tax Authorities regime. This means that in those regions, the assessment of social insurance contributions is handled by social insurance administrative agencies while the collection is handled by tax authorities. The disadvantages of such regimes are as follows:
- Social insurance administrative agencies do not have access to the actual wage information of employees and rely heavily on PRC enterprises to declare such information. Therefore, it is not uncommon for PRC enterprises to make social insurance declarations with omissions, or understate chargeable amount, or even fail to make the social insurance declarations as required.
- Social insurance administrative agencies do not assess the five social insurance items simultaneously. Instead, each social insurance item is assessed by a separate social insurance administrative agency. Moreover, there is no shared database among various social insurance administrative agencies, causing significant variance in the contribution rates for different social insurance items.
The impact of the Reform Plan
Under the Reform Plan, the Assessment and Collection by Tax Authorities regime will be adopted nationwide. This means that the premiums of the basic pension insurance, the basic medical insurance, the unemployment insurance, the work-related injury insurance and the maternity insurance will all be collected by tax authorities, which will then take over all aspects in relation to social insurance contributions, including assessment, collection, recovery and imposition of punishments.
When compared to social insurance administrative agencies, tax authorities are in a better position in terms of the means of contribution collection, access to information and enforcement powers. We predict that there will be at least five key changes after the full implementation of the Reform Plan:
The number of cases of non-payment, underpayment or late payment of social insurance contributions will drop significantly.
- Tax authorities have direct access to detailed corporate information of PRC enterprises (including the number of employees, the income and applicable contribution rates for employees and the financial status of the enterprises). With the tax records available to them, tax authorities may easily use information such as actual wages in the assessment of social insurance contributions.
- Therefore, enterprises will no longer be able to avoid social insurance contributions even if they omit to make social insurance declarations or make declarations with inaccurate information as the actual wages of employees will be directly reflected in the chargeable amount of social insurance contributions.
Making inter-regional social insurance contributions through human resources service providers will no longer be feasible.
- In the past, many enterprises would engage staffing agencies (such as FESCO, CIIC or other similar entities) as human resources service providers. These agencies would make social insurance contributions for employees who perform their duties in a region which is not the region where the enterprise is incorporated and registered. Such payment method of social insurance contributions was practically feasible despite of its risks of non-compliance.
- After the Assessment and Collection by Tax Authorities regime has been fully adopted, local tax authorities will be able to identify all discrepancies between tax filings and social insurance declarations. Tax authorities will likely not accept explanations given by enterprises on why the aforesaid practice was adopted, since it is not in compliance with the law.
- Therefore, in order to ensure compliance with the requirement of the entity paying wages and the entity contributing to social insurance payments being the same entity, an enterprise will have to make social insurance contributions for their employees in the region where it is incorporated and registered.
There may be real and stringent recovery actions on previous non-compliance with social insurance requirements.
- As there is no limitation period for actions against social insurance non-compliance under the Social Insurance Law and relevant regulations, government authorities may hold enterprises accountable for all their previous non-compliance with social insurance-related regulations.
- After the tax authorities have taken over the collection of social insurance contributions, they will likely review the information they possess and recover from enterprises defaulted on social insurance contributions.
- The tax authority of Heilongjiang province has already issued a documentation in which it expressly stated that it would commence recovery actions against enterprises which failed to make full payments of social insurance contributions.
- We foresee that other local tax authorities will also step up their investigation efforts and punitive actions in relation to non-compliance with social insurance regulations.
The payment of social insurance contributions will become compulsory and transparent for Hong Kong, Macao and Taiwan (HMT) residents and foreigners who work in the PRC.
- Pursuant to Article 11 of the Provisions on the Administration of the Employment of Taiwan, Hong Kong and Macao Residents in the Mainland promulgated in October 2005, HMT residents who work in the PRC and their employers shall make social insurance contributions.
- In October 2011, the Ministry of Human Resources and Social Security (MOHRSS) issued the Interim Measures for the Participation in Social Insurance of Foreigners Employed in China, requiring employers to make social insurance contributions for all employees who are non-PRC nationals (including direct hirers and secondees) having obtained legal work and residence permits (including both permanent residents (PRs) and non-PRs).
- However, the actual measures implemented by different local governments differ greatly. For example, the position of the local authority of Shanghai has been kept as “non-compulsory and negotiable” in relation to social insurance contributions of HMT and foreign employees.
- As all declared income of employees earned in the PRC will be included in the assessment of social insurance contributions, we foresee that the payment of social insurance premiums will become compulsory and transparent for these employees after the tax authorities have taken over the collection of social insurance contributions.
The “responsible enterprise officers” accountable for the failure to comply with social insurance regulations may be restricted from travelling by aircraft.
- According to the Opinion on Appropriately Restricting Particular Persons with Severe Dishonest Behaviours from Travelling by Aircraft within a Certain Period (No. 385 ) issued by the National Development and Reform Commission(NDRC), individuals who (1) fail to participate in the social insurance programme and fail to rectify; (2) fail to honestly declare the income chargeable to social insurance and fail to rectify; or (3) are required and have the financial means to make social insurance contributions but refuse to do so, will be blacklisted as “persons with severe dishonest behaviours” and will be subject to certain restrictions for air travel.
- Although the aforementioned document does not specifically define the scope of responsible enterprise officers, we believe that the legal representatives, senior management and management team with the direct duty to ensure compliance with social insurance regulations (such as the director of human resources) of PRC enterprises will likely be affected if they fail to procure their respective enterprises to comply with the applicable social insurance regulations.
Issues to be resolved
Despite the promulgation of the Reform Plan, the following questions in relation to social insurance remain unanswered:
- Which entity group (social insurance agencies or tax authorities) shall be responsible for the enforcement, administration and handling of complaints regarding social insurance?
- How should the reconciliation of individual income tax filings and social insurance declarations operate?
- Should the contribution rates of social insurance be lowered to reduce the financial burden on employers and employees?
Matters that human resources personnel of PRC enterprises should note
Under the Reform Plan, local tax authorities shall start to implement the reform by the end of 2018 and relevant measures shall be substantially in place by late March 2019. We recommend that human resources personnel of PRC enterprises should:
- Closely monitor the local regulations and enforcement measures on social insurance.
- Make full social insurance contributions for HMT and foreign employees in a timely manner. We predict that these employees will be the main targets of compliance checks by tax authorities after the cancellation of the administrative approval system for HMT employees and the launch of the PRC residence permit application for HMT residents.
- Conduct internal compliance review on social insurance and be well prepared for the potential investigations, recovery and punitive actions by relevant tax authorities.