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China enhances tax incentives for employment stabilisation

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Lewis Lu of KPMG China discusses enhanced tax benefits for employers, designed to revitalise the country’s post-pandemic employment market.

On August 2 2023, China's Ministry of Finance, State Taxation Administration (STA), Ministry of Human Resources and Social Security (MOHRSS), and Ministry of Agriculture and Rural Affairs (MOA) jointly released Notice No. 15 ("Circular 15"). This circular enhances 2019 incentives to stimulate employment, especially tax incentives for enterprises hiring certain underprivileged groups.

Key features of Circular 15 incentives include:

  • Each “qualified” employee can generate a maximum of RMB 23,400 (approximately USD $3,300) worth of tax benefits for employers. These tax benefits can be used for up to a maximum of three years, and can be received as refunds or reductions in various taxes including VAT, Urban Maintenance and Construction Tax, educational levy, local educational levy and corporate income tax;

  • To qualify, employees need to have employment contracts lasting over a year and have paid social security premiums. "Qualified" individuals include those identified by the national anti-poverty monitoring system or those unemployed for more than six months and registered with the Human Resources and Social Security Department/Public Employment Agency;

  • A database that collates the information for “qualified” personnel has been established. The MOHRSS, MOA and STA will facilitate the smooth sharing of this information, including sharing of information from the central to local level; and

  • Circular 15 is retroactively effective from January 1 2023, and taxpayers can enjoy the tax benefits until December 31 2027, allowing existing and new employees to benefit for up to three years of their employment.

Circular 15 employment stabilisation tax benefits represent an improvement over previous policies. They encourage employers to hire specific vulnerable demographics, allowing for the development of their skills, and can be seen as ESG-aligned.

Based on KPMG's experience with previous employment stabilisation incentives, it is observed:

  • Only a handful of enterprises have set specific hiring criteria to encourage the hiring of “qualifying” personnel. As such, many companies’ workforces have been built without considering these tax incentives as a factor in hiring;

  • Sample historical data (from a manufacturing enterprise) showed a hit rate of 8% to 14% among the entire employee population. The “hit rate” varies across sectors, regions, and wage levels. Some sectors like IT may have a lower hit rate, while an original equipment manufacturer factory for consumer electronics in Suzhou (i.e., an affluent city in central China) could have a higher one;

  • Many tax bureaus lack experience in handling this specific incentive, necessitating education efforts for both enterprises and tax officials; and

  • Securing the incentive can be time-consuming (usually two to four months), potentially involving multiple government authorities and the deployment of dedicated resources (both internal and external).

Circular 15 incentives arrive at an opportune time, given that the employment market has been severely impacted by the post-COVID-19 economic environment. With many companies actively seeking ways to support their businesses, deploying resources and planning implementation could lead to substantial benefits for eligible employees.

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