Heightened enforcement of social insurance non-compliance by Chinese tax authorities

The Chinese government has delegated more powers to the tax bureau in relation to the social insurance collection process to further supersede the function of the social insurance centre. In view of the tax bureau’s function to collect individual income tax, as well as the applicable individual income tax payment policy in China, the tax bureau is better resourced to identify any non-compliance issues in the social insurance contribution process.

Multinational companies operating in China should review and check their social insurance contribution practices to ensure compliance and avoid any potential penalties or disputes.

BACKGROUND

On 1 July 2023, the Chinese provinces of Yunnan, Jiangxi, Chongqing and Zhejiang updated their social insurance collection procedures, requiring companies to declare their social insurance directly to the local tax bureau, instead of the social insurance centre. Guangdong, Shanghai and Beijing, as well as some other provinces and cities also started to adopt such practices at the end of 2023 and the beginning of 2024.

In actual fact, the tax bureau has been responsible for collecting social insurance for years. As of 1 January 2019, the authorities in charge for collecting social insurance contributions changed from the social insurance bureau to the tax bureau. However, the tax bureau was only responsible for collecting social insurance, while the social insurance centre continued to be responsible for checking and verifying the amount of social insurance contributed. If there was a problem with the amount of social insurance, the individual and the company would be required to escalate the issue to the social insurance centre. Only if the new calculation was confirmed and approved by the social insurance centre, would the updated data then be passed to the tax bureau for implementation.

IMPLICATIONS

The new change simplifies the process by further reducing the involvement of the social insurance centre in the collection procedure. Companies will now declare their social insurance and requested changes directly to the tax bureau. This change has been implemented because the tax bureau is better resourced to monitor and collect social insurance contributions, and is more likely to identify any non-compliance in social insurance contributions.

For example, it will be easier for the tax bureau to ascertain whether employers that withhold and pay individual income taxes for their employees is consistent with those that contribute social insurance for their employees. This practice is commonly adopted by companies that have employees working in places where the company does not have any presence. Since companies in China are only permitted to enroll their employees in social insurance schemes in their registered locations, companies usually engage a staff agency located in the employee’s working and living location to enroll their employees into local social insurance schemes to enable the employees to enjoy the social benefits.

In 2020, Beijing released a policy to explicitly ban this practice, and since then more and more provinces and cities have followed suit. In practice, the policy is usually released to staff agencies first, meaning companies are then under a time pressure to rectify their practices after learning of the change from the staff agencies. Since the tax bureau has now taken over certain functions from the social insurance centre to monitor and manage social insurance collections, it is expected that the general enforcement of the rectification of the aforementioned third party social insurance payment arrangement will most definitely be strengthened in the future.

WHAT COMPANIES NEED TO DO

In light of the new change, we advise companies to perform internal checks in order to correct any non-compliance issues and avoid any possible penalties in this regard. For companies that currently have employees working outside of their registered places, please refer here for information on earlier developments and the corrective solutions available in response to the new requirements. Companies should also be thinking ahead about their options so that they can move quickly if the practice becomes strictly banned in the future.