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New Tax Policy

A. On 19th May 2017, China's State of Administration of Taxation (SAT) issued a new guidance, the Bulletin 16. It requires the specification of the taxpayer identification number of the unified social credit number on a VAT general invoice.

B. On 28th April 2017, Ministry of Finance, China Insurance Regulatory Commission and State Administration of Taxation jointly issued Circular Cai Shui [2017] No. 39 (Circular). The new Circular regulates the tax deductibility of the expenses for purchasing qualifying commercial health insurance products by individuals.

A. Highlights of Bulletin 16

Use of taxpayer identification number or unified social credit number on VAT general invoices From 1st July 2017, when an enterprise is involved in a VAT-able transaction as purchaser and it requests a VAT general invoice from the seller, the buyer (the enterprise) shall provide its taxpayer identification number or unified social credit number to the seller. The term “enterprise” is broadly defined. Corporation, noncorporate enterprise, branch office, partnership, sole proprietorship and other forms of enterprises are all included in the definition of enterprise. The seller must complete the column “TIN of purchaser” on the VAT general invoices. VAT general invoices lacking TIN of purchaser won’t be considered a valid supporting document for tax purpose.

Authenticity of invoice information

Bulletin 16 highlights that it is essential for all information in a VAT invoice to be consistent with the facts underlying the transaction; a seller might not issue a VAT invoice that contains incorrect price information, sales volume, or other information even when this is requested by the buyer. Many taxpayers, to simplify the invoicing process, have interfaced their sales platform Systems with a VAT invoice management system so to import the invoicing data into the system automatically. Considering this situation, Bulletin 16 precisely requires sellers to ensure the consistency between the invoicing data exported from the sales platform and the actual transaction.

B. Highlights of Circular

As of July 1, 2017, pilot policies for individual income tax on commercial health insurance shall be promoted nationwide. "

Issues concerning Policy Contents

The expenses regarding the purchase of qualifying commercial health insurance products by individuals are tax deductible to the amount of CNY 2,400 per year when the taxable income is calculated in the current year, or to the extent of CNY 200 per month when taxable income is calculated in the current month. If the above considered expenses for commercial health insurance products are purchased for the employees by the employer, they must be included in individual salaries of the employees as if the products were purchased by the employees and are deductible within the above limit. The considered limit of deduction, CNY 2,400 per year or CNY 200 per month, qualifies for a deduction on its own and goes beyond the standard deductions prescribed by individual income tax laws.

Issues concerning Applicable Targets

The term Taxpayers subject to the preferential tax policies for commercial health insurance is broadly defined and includes:

1. Individuals who receive income from wages and salaries, or successional income from remuneration for labour services;

2. Investors of sole proprietorships, partners of partnership enterprises, individual business owners and contractors or leasees who receive income from production and operation by individual businesses, or income from contracted or leased operation of enterprises or public institutions.

Issues concerning Specifications and Conditions for Commercial Health Insurance Products

Qualifying commercial health insurance products concern health insurance products created by insurance companies by reference to the guidance framework for and demonstration provisions on health insurance products offering personal income tax incentives. They must meet the following requirements:

1. Health insurance products shall be universal insurance providing security and guaranteed minimum income benefit. It has a dual function, medical insurance and individual account deposit. The insurance companies from which they take out their insurance policies shall manage and maintain insured’ individual accounts.

2. Taxpayer groups aged 16 or above and under mandatory retirement age are included in the insured category. Insurance companies cannot refuse to offer insurance to the insured due to their medical history and shall guarantee renewal of insurance policies.

3. The medical insurance covers out-of-pocket expenses within the scope of medical benefit fund in the place where the insured take out medical insurance and medical expenses exceeding basic medical benefit fund. The specifics of the reimbursement (scope, proportion and limit) shall be specified by insurance companies depending on the different product characteristics.

4. The same health insurance products may require different insurance amounts, depending on the specific situations of the insured. The China Insurance Regulatory Commission should set the lower limit of the insurance amount.

5. If the policy year loss ratio of medical insurance is lower than lower medical loss ratio limit, complying with the “thin-profit” principle with respect to health insurance products, insurance companies are expected to pay the difference between actual loss ratio and lower medical loss ratio limit to the individual accounts of the insured.

The complying health insurance products are directed at three taxpayer groups in accordance with the current security programs and demands:

1. Those who plan to reimburse the outstanding medical expenses - which they shoulder - after they are refunded for their medical expenses through free medical care and basic medical insurance;

2. Those who plan to reimburse the outstanding special large medical expenses - which they shoulder - after they are refunded for their medical expenses by free medical care and basic medical insurance;

3. Those who neglect to take part in free medical care programs or take out basic medical insurance, but they plan to refund the medical expenses which they shoulder. Insurance companies shall present their complying health insurance products proposing personal income tax incentives to the China Insurance Regulatory Commission in agreement with the procedures laid down in the Insurance Law for approval.

Issues concerning Levying and Administration

Three are the key issues concerning levying and administration:

1. If employers purchase qualifying health insurance products for their employees or employers and employees jointly purchase them, the total amount of premium paid by the employers must be included on a real-name basis in the payroll of employees as if these products are purchased by the employees. In the month following the purchase of products, the personal income tax levied on commercial health insurance premium can be deducted by the employers to the maximum extent of CNY 200 monthly. If the amount exceeds the value of CNY 2,400 on yearly basis, the exceeding part cannot be deducted before personal income tax. The above provision applies for renewable insurance policies, from the following years onwards. Employees must promptly communicate withholding entities of their discharge of insurance, and insurance companies shall submit information to tax authorities on employee’s insurance discharge.

2. If Individuals receive income from wages, salaries or successional income from remuneration for labour activities, they shall promptly furnish their health insurance policies to withholding entities when they purchase qualifying health insurance products. In the following month, personal income tax levied on health insurance premium can be deducted by the withholding organisms to the maximum extent of CNY 200 per month. If the amount exceeds the value of CNY 2,400 in a year, the exceeding part shall not be deducted before personal income tax. As far as renewable insurance policies are concerned, the above provision shall apply from the following years onwards. Employees shall promptly inform withholding obligators of their discharge of insurance.

3. If individual business owners, individuals engaged in contracted or leased operation of enterprises or public institutions, investors of sole proprietorships and investors of partnership enterprises purchase qualifying health insurance products, personal income tax on health insurance premium can be deducted according to the actual premium paid up to the extent of CNY 2,400 per year. If that threshold is exceeded, the exceeding part cannot be deducted before personal income tax. The above provision applies for renewable insurance policies,