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Guest Comment: Social Insurance contributions for foreigners in China – what are the implications?

Antal International has spoken to the British Chamber of Commerce in Shanghai and finance experts about the introduction of Social Insurance (SI) contributions from foreigners. Our findings show that HR departments will have to make some adjustments to their payroll policies and their ability to provide benefits to expats. The amount of administration needed to employ a foreigner in China will increase. For expatriates paying SI taxes in their home country, a form of double taxation will be in place.

What are the details of the new Social Insurance policy?

The policy requires all foreign individuals working in China to contribute to the social security system. SI in China includes a range of insurance schemes that include basic pension, medical, unemployment, work-related injury and maternity insurance. Participation is likely to be compulsory, with fees paid through both employer and employee contributions.

The British Chamber of Commerce Shanghai has released a white paper on the topic, produced by law firm Pincent Masons, that explains: “Employers will be responsible for registering their employees with the local scheme administrator and for paying the employee contribution on their behalf”.

The draft guidelines were announced on 1 July 2011, but have not yet been implemented everywhere in China. This is because the reform has not been cleared in each locality, with only the Pearl River Delta having seen changes in place. It is predicted that in October the policy will be clearer. Only those with work visas who are being paid in yuan will be liable to pay SI in China. Temporary workers, or those being paid in their home country’s currency will therefore not be taxed.

The figures

Although amounts have not yet been released, we have found that employers will be liable to pay up to 37 pert cent and employees will have to pay 11 per cent of base salaries. The BritCham white paper states that the SI law will “significantly increase the costs of employers engaging foreign nationals working in China”. The biggest contribution will be to pension payments, at 22 per cent of the employee’s base salary to be paid by the employer.

Most expats will not continue to live in China beyond retirement, and therefore will not reap the rewards of the policy. It is stated that employers and employees respectively will be able to claim a rebate, but it is unclear how flexible the Social Security Administration Department will be in regards to claiming back pension funds.

What are the likely outcomes?

There is a case to be made for the new SI law being a positive move for employee relations. HR departments everywhere in China will now definitely be covering their employees’ pension and health insurance, regardless of their nationality. However, the level of the healthcare, injury and maternity insurance is unlikely to be at the same standard as private plans. If companies do replace their private plans with the Chinese SI cover, expatriates must expect to see changes in what they can claim for and what they cannot.

Having spoken to tax specialists in Shanghai, I understand that we can expect more news on the implementation, rates and possibilities of exemptions in October, with the new regulations likely to be made definite by January 2012. Until then, the policy in Beijing and Shanghai remains inactive.

Some nations are currently negotiating their SI policy relations with China. So far Korea and Germany are said to have made totalisation agreements. This means that their nationals will not pay SI, and in return Chinese nationals will be exempt from paying SI fees in Korea and Germany. Whether more of these bi-lateral agreements will appear is unknown.

Impacts on HR policy

Despite the new costs on businesses and employees, Antal International predicts that the expat influx will be largely unchanged. This is for several reasons. There is a small niche of important and globally valuable expats coming to China. The extra costs will not deter the recruitment market from hiring globally experienced managers and directors for multinational corporations. Local Chinese candidates alone cannot sustain the demand for the top senior employees.

There is too much ambiguity to deter expats from coming to China. Perhaps once the scheme is fully functioning and we know more of the exact financial costs, HR departments will begin to construct new strategies. Concerning the possibility of a lowering of expat benefits, there’s a chance that the private medical and pension insurance schemes already in place will be displaced by the new SI involvement.

Summary of advice to HR

· Be prepared to start accounting for the SI policy from January 2012 onwards.

· Watch out for new legislation and news of international negotiations from Chambers of Commerce.

· When the policy is in place, be sure to find out how to claim back pension participation with the Social Security Administration Department when leaving the country.

Sarah Jones is a manager at Antal International in China.

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