Analysis and Suggestions of tax-related clauses of contracts (III) : 8 tax-related issues related to labor contracts

The tax-related clauses such as contract price and settlement method analyzed in the first two chapters are universal and widely applicable to various civil and commercial scenarios. This time, it is a more common contract that every social person can encounter - the labor contract.

In our country, the main content of the labor contract is subject to the “Labor law”, “Labor Contract law” and related laws and regulations, and it seems that they have not noticed what tax-related clauses in it?

Yes, but no. It is true that we generally do not specifically agree on tax-related matters in labor contracts, but in fact, the tax-related issues of labor contracts are not simple, which runs through the contract signing, performance, rescission, termination, compensation and even arbitration, litigation and other links.

1. The issue of double wages without a labor contract

Article 82 of the Labor Contract Law, in order to protect workers and promote the signing of labor contracts, stipulates that “if a written labor contract has not been concluded with a worker for more than one month and less than one year from the date of employment, the worker shall be paid twice the monthly wage.” The problem of double wages is also a more common unit compensation item in labor disputes.

So the question comes, does the “double salary” here need to pay personal income tax as salary income? In practice, there are disputes.

From what I have learned, most tax bureaus believe that income from wages and salaries should be taxed, because the definition of income from wages and salaries includes “other income related to office or employment” [1].

In some places, such as Shenzhen, there is another opinion on this, that is, “twice the salary” is punitive compensation, and it is not regarded as the labor income obtained by individuals due to employment, and it is not part of the personal income items, and it is not subject to individual income tax [2].

2. The issue of back pay

First, a question: employees and units to conduct labor arbitration, the award will take effect in 2023. The effective instrument ruled that the employer should compensate a total of 170,000 yuan of wages from 2021.10 to 2022.8. The salary is the sum of the salary of the past 10 months. Should the personal income tax be deducted as a lump sum or divided into each month?

This problem was published on the 12366 tax service platform, and the Beijing Municipal Tax Bureau replied: The tax calculation should be carried out in accordance with the salary payment period, and the tax declaration period stipulated in the tax law should be declared.

That is to say, the income tax on the back pay can not be shared. However, this is in line with the principle of the cash basis of personal income tax collection and payment.

At the same time, this is also the consensus of most local tax bureburets, but it has a high probability of causing those who should not pay taxes to need to pay taxes (the taxable income after deducting various expenses is 0), or those who could have applied low tax rates to need to apply high tax rates (the taxable income becomes higher after accumulation).

According to the author's inquiry, only see Xiamen Municipal Tax Bureau has a rather humanistic care policy: after labor arbitration or court judgment and pay wages, you can correct the declaration of the previous tax period; In other cases, individual income tax can only be declared according to the normal monthly wages and salaries, and the tax period is filled in the month of the payment of wages, and the declaration period of the next month of the payment is declared.

3. The “year-end bonus” issue

At present, for the annual one-time bonus (commonly known as “year-end bonus”), there is still a tax incentive policy before December 31, 2027. But whether it is really “preferential” is different from person to person, and each taxpayer can choose to apply the corresponding policy. That is, it can choose to be incorporated into the comprehensive income of the current year to calculate the tax, or it can not be incorporated into the comprehensive income of the current year, divide the annual one-time bonus income by the amount obtained in 12 months, determine the applicable tax rate and the quick deduction number according to the monthly tax rate table, and calculate the tax separately [3].

The specific how to “vary from person to person”, the author suggests that you can use the “personal income tax” App to try these two ways when the final settlement is settled in the next year, and select the one that pays the least tax. In general, the monthly salary of the group is not too high may choose to be incorporated into the consolidated income of the year.

And it's important to note that this policy can only be used once a year. For example, the “quarterly award” of the year, the taxpayer chose to calculate the tax separately, and the “year-end award” of the year can not be used.

In addition, there is a special “pit” place, that is, the tax payable calculated by the “separate tax” method is not completely linear with the one-time bonus amount, but at some critical positions, there is a trap of “increasing the bonus but decreasing the actual amount.”

These trap ranges are around $36,000, $144,000, $300,000, $420,000, $660,000 and $960,000, respectively. We can intuitively feel it through the following figure prepared by the author, and avoid the above interval in the actual scene as much as possible to better play the tax advantage function.

4. Economic compensation upon termination of the contract

On this issue, the State Tax Administration has a clear tax policy support, there should be no great doubt.

The “Notice on the connection of Preferential Policies after the Amendment of the Individual Income Tax Law” (Finance and Taxation [2018] No. 164) stipulates that the one-off compensation income obtained by an individual and an employer after the termination of labor relations (including economic compensation, living allowances and other subsidies issued by the employer) shall be within 3 times the average salary of the local employee in the previous year. Exempt from individual income tax; The part of the amount exceeding three times shall not be incorporated into the comprehensive income of the current year, and the comprehensive income tax rate table shall be applied separately for tax calculation.

5. Compensation when the unit illegally terminates the contract

Tax issues, sometimes very “serious”; When applicable, the concept (connotation and extension) of the key words in the law is very important. The “compensation” here is an example.

According to the provisions of the above-mentioned Finance and Taxation [2018] No. 164, the key word is “one-time compensation income”, and its extension includes “economic compensation, living allowances and other subsidies issued by the employer”. So, does the compensation for illegal rescission fall into this conceptual category? There are no written rules or official explanations.

Some courts hold that the economic compensation paid by the unit is based on the original employment relationship between the unit and the worker, so the worker's compensation income belongs to other income related to his office or employment. The imposition of personal income tax on this income is justified by law and is not improper [4].

Article 87 of the Labor Contract Law stipulates that “Where an employer rescinds or terminates a labor contract in violation of the provisions of this Law, it shall pay compensation to the laborer twice the standard of economic compensation provided for in Article 47 of this Law.” It can be seen that from the amount standard, the compensation is twice the economic compensation. Furthermore, where compensation has been paid in accordance with Article 87 of the Labour Contract Law, no financial compensation will be paid [5]. This shows that compensation and double economic compensation is not purely quantitative equal, its connotation is also consistent and equivalent.

Therefore, the author believes that the compensation can fully apply the policy of Finance and taxation [2018] No. 164, and some local tax bureburees support this view.

6. Economic compensation when the contract expires

According to Article 46 (5) of the Labor Contract Law, the employer shall also pay economic compensation to the worker if the labor contract is terminated upon expiration, except in the case that the employer maintains or increases the conditions stipulated in the labor contract and the worker does not agree to renew the labor contract.

The premise stipulated in Document No. 164 of Finance and Taxation (2018) is that in the scenario of the termination of the labor relationship between the employee and the employer, the concepts of “termination” and “termination” of the contract are completely different.

Moreover, from the perspective of the historical evolution of the provisions, the Finance and Taxation (2018) No. 164 is a complete translation of the corresponding legal contents of the finance and taxation (2001) No. 157; The legislative purpose of the latter is “to further support enterprises, public institutions, organs, social organizations and other employers to promote the reform of the labor and personnel system, properly settle the relevant personnel, and maintain social stability.”

Therefore, there is an inherent reason that Finance and Taxation [2018] No. 164 applies only to the “termination” of the contract and does not include “termination”. Before the introduction of the new standard document, it is already a consensus that the economic compensation for the “termination” of the contract is not applicable to Article 164 of Finance and Taxation [2018].

7. Economic compensation for non-competition

According to Articles 23 and 24 of the Labor Contract Law, a company may agree on a competition restriction clause with a specific worker. If the competition restriction clause is triggered, the unit shall give economic compensation to the worker on a monthly basis according to the agreement.

Should the “economic compensation” workers here pay taxes? How do I hand it in?

Tax bureaus in most parts of the country, including Beijing and Shanghai, believe that the financial compensation for the competition restriction should be withheld as income from wages and salaries on a monthly basis. The reason is also very simple, although the obligation of competition restriction is the obligation that arises after leaving the job, it is also the obligation stipulated in the performance of the labor contract. As the corresponding consideration of the obligation, the individual income tax should be paid according to the salary income.

However, there are also tax bureaus in individual regions that collect their personal income tax according to “accidental income” or as a compensation income obtained from the dissolution of labor relations, but it is not the mainstream view.

8. Does the company have the business of withholding employee income tax when it performs or is executed the ruling/judgment?

This is the most controversial of the eight questions in this article. There are two arguments, each with its own merits.

Those who support not withholding and repaying believe that the person subject to execution should strictly comply with the amount determined by the award/judgment. The reason of this point of view is “separation of trial and execution”, strictly according to the execution of the judgment; If there are any problems, they should be resolved through legal channels.

Those who support the idea of withholding and repaying believe that the person subject to enforcement should perform the tax law obligations in the era of withholding and repaying individual income tax, and the withholding and repaying part should be regarded as the performance of the effective legal instruments.

No matter which point of view, employers must pay attention to this matter. Otherwise, it is easy to fall into a “dilemma” - withholding and remitting may face enforcement without fully fulfilling the amount specified in the effective instrument; Failure to withhold and pay may result in tax penalties [6].

Therefore, the author's suggestion is: the unit should give priority to negotiate with employees to reach a written agreement on withholding and repaying; If no agreement can be reached, contact the court as soon as possible to request clarity on whether to fulfill the withholding obligation. If the court considers that withholding and payment is not necessary, the unit shall report to the competent tax authority in time [7] and request the tax authority to recover the payment directly from the taxpayer or issue a notice to the court to assist in execution, and deduct the execution payment to the employee.

The above 8 questions, due to the different caliber in practice, it is recommended that the parties timely consult the local 12366 tax service platform or the competent tax authorities.

Footnote:

[1].See Article 6 of the Implementation Regulations of the Individual Income Tax Law of the People's Republic of China.

[2].Refer to the (2015) Shenzhen-China-Law Enforcement Decision No. 89 of the Shenzhen People's Court and the (2019) Yue0305 Enforcement Decision No. 6314 of the Nanshan District People's Court of Shenzhen.

[3].See the Notice of the State Administration of Taxation of the Ministry of Finance on the connection of Preferential Policies after the amendment of the Individual Income Tax Law (Finance and Taxation [2018] No. 164) and the Announcement of the State Administration of Taxation of the Ministry of Finance on the continuation of the Annual One-time Bonus Individual Income Tax Policy (No. 30, 2023).

[4].See (2017) Yue0404 Xingchu No. 327 Administrative Judgment of Zhuhai Jinwan District People's Court.

[5].See Article 25 of the Implementation Regulations of the Labor Contract Law of the People's Republic of China.

[6].Article 69 of the Law of the People's Republic of China on the Administration of Tax Collection stipulates that if a withholding agent fails to withhold or receivables but fails to collect the tax, the tax authorities shall recover the tax from the taxpayer and impose on the withholding agent a fine of not less than 50% but not more than three times the amount of the tax not withheld or receivable.

[7].See Article 94 of the Implementation Rules of the Law of the People's Republic of China on the Administration of Tax Collection.