China Could Introduce Expatriate Insurance Tax

Posted on Jun 02, 2011 by Sergio Ulloa (G+)  | Tags: China

The People's Republic of China is considering a new tax on expatriate workers and their employers as it plans to broaden the country's first social insurance law to include foreign nationals who now work within the world's second largest economy. These new fees would be part of the Chinese government's broad social-security reforms that were initially published last October and set to take effect on July 1st. The compulsory insurance costs could vary principally by location. Based on Shanghai financials, companies employing foreign nationals could be required to pay up to CNY4,324.56 (US$667) per month in social insurance contributions, while individual expatriate workers could be subject to an additional CNY1,285.68 (US$198) a month in exchange for access to retirement benefits, workplace injury, unemployment and maternity insurance, and subsidized fees at public hospitals amongst other services. Xu Yanjun, deputy director of social security center of the Ministry of Human Resources and Social Security, told reporters Tuesday: "There were some 231,700 foreigners with work permits living in China by the end of 2010...The move will ensure foreign employees in China enjoy the same social insurance benefits as Chinese nationals do." Xu added that the law will ensure that expatriates from countries with "bilateral social insurance agreements" with China, such as Germany and South Korea, will be able to opt out of the system. China and the United States Social currently do not share such an arrangement. Only foreigners with legal work permits would be eligible to benefit from the social insurance programs. China is engaged in an expansive, multi-billion dollar endeavor to redevelop its hospital infrastructure, improve pharmaceuticals distribution and modernize basic health services and quality control for its 1.4 billion inhabitants. The country's health system was established in the Communist era where benefits were delivered by the state. Today the system has become an over encumbered pay-as-you-go bureaucracy. The new Social Insurance Law has been developed to consolidate pensions, benefits and various insurance programs. The need to both upgrade and streamline the social safety net is a pressing economic and political issue for China. The country's enormous population is aging rapidly and growing anxious about future access to health care. Alleviating these concerns could eventually encourage Chinese consumers to spend more of their considerable savings, rather than holding on for emergencies. While social-security modernization efforts could address upcoming problems for China, many question the impact these adjustments will have on their foreign workforce. Analysts remain uncertain about many aspects of the new social insurance proposal including whether the law will be voluntary or mandatory and how rigorously the taxes will be collected. If the new social-security taxes are collected aggressively, foreign workers will complain that the plan is extortionate. The government has yet to clarify if the new social insurance scheme will apply to all foreign workers on a national basis, whether localities will have any discretion over which foreigners are eligible, or if expatriates who leave China be able to continue to draw benefits. The eligibility of nationals from Taiwan, Hong Kong and Macau also remains unclear. Many expatriates in China today opt for international insurance policies. The foreign labor force largely comprises of short-term residents and executives in big cities with comfortable job packages. Few would stay in country for the 15 years required to draw from the pension plan being developed. Market analysts observe however, that the Chinese government may anticipate that, as the national economy continues to grow, it will begin to draw more economic migrants of lesser means and the healthcare system will need to restructured accordingly. Throughout China, both labor costs and taxes are increasing rapidly. The European Union Chamber of Commerce in China has expressed concerns to China's ministry of human resources and social security that these new social insurance levies on expatriate staff could further increase the costs of doing business in the country. Income tax rates in large cities like Shanghai are already seen as an impediment towards attracting qualified foreign financial professionals. The Chamber argues that insurance contributions for foreigners should stay optional. Ronan Diot, chairman for the Legal Working Group of the European Union Chamber of Commerce in China, commented that these developments were logical in some ways. "You work locally, you pay social insurance locally," he said. There will be issues however, he argued, if expatriates are forced to pay out for inferior services to those they currently enjoy, which is possible given the fluctuating level of medical care available in many cities. Further details about the social insurance law are not expected for several months. The Chinese government has been known to reveal and adjust regulations in the months following a law's enactment. The process is often complicated further by conflicts between broad national parameters and those eventually written more locally by city district governments. Lesli Ligorner, partner at Paul, Hastings, Janofsky & Walker in Shanghai, has advised expatriates and their companies to pay close attention to upcoming developments surrounding this law. "A lot of people I've talked to about this are in denial," she claimed in a Financial Times article. Mrs. Ligorner further maintained that expatriate inclusion within the Chinese social security system would become mandatory. "It is going to affect labor costs significantly," and could ultimately lead to some employers canceling costly medical insurance policies for their staff. As it stands, China does not appear to be ready on July 1st to immediately begin charging social insurance premiums to the considerable expatriate workforce currently active in the country, nor their employers. Social insurance contributions are not handled at state level in Beijing but through local channels, and thus municipal labor departments will take time evaluating and implementing the new rules. How mandatory social insurance contributions for expatriates could impact foreign business in China is yet to be determined. If social insurance taxes match those planned for Chinese employees (3 times the average salary in a municipality), then this could be a considerable cost to some companies, especially those that employ many relatively young foreigners, whose insurance contributions would be a considerable proportion of total salary costs. However, since cost has not traditionally been the main factor for many companies in choosing between foreign employees or Chinese, and salaries for expatriates have remained comparatively high, the impact on the labor market could be limited. Many foreigners are nowadays choosing to come to China, in particular Shanghai and Beijing, to start their careers. Once these new social insurance mandates are finally initiated, employers may have to either take on an additional cost burden or ask their new foreign employees to take pay-cuts for the opportunity to develop their career in the world's second largest economy. The difficulty of that prospective decision will hopefully be made clear, as further details about the Chinese government's plans emerge in the coming months.