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Tax on Goods and Products received for Battling COVID?
2023-08-22
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Recently, the domestic COVID situation in China is fierce, and appears to have spread to more than ten provinces, bringing great challenges to the normal production and life of individuals and enterprises. Since March 28, 2022 most residential and office buildings in Shanghai have been temporarily locked down, and many companies have started a work-from-home operation model. Though the COVID situation is fierce, many enterprises choose to stand with their employees and fight COVID together. To ensure the living needs of the quarantined employees, they organize the purchase and delivery of various materials such as daily medicines, medical supplies, protective supplies, food, daily necessities, and other materials to ensure that the normal life of employees is not threatened.

Knowing the background, let me ask you: is it necessary to pay individual income tax (IIT) on the goods and products gifted by the employers and government during the COVID period?

Ⅰ The general welfare granted by the employers to each employee

1. The Subsidies granted to every employees by the employers shall be calculated in counting IIT

According to Article 2 of < Notice of State Administration of Taxation on Issues Concerning the Determination of the Scope of Living Allowances > (Guo Shui Fa [1998] No. 155) (hereinafter referred to as the “Notice on Living Allowances”), The subsidies and allowances paid to each of the employees from welfare funds or trade union outlays shall be merged into the taxpayers’ wage and salary income for calculation and collection of individual income tax. 

2. Recognition of “Subsidies granted to every employees 

How to understand the “Subsidies granted to every employees” in the above provisions, the State Administration of Taxation answered in the interpretation of tax policies in the third quarter of 2018. According to the current Individual Income Tax Law, individual income tax shall be paid in accordance with the law on the benefits granted to individuals by the employer, whether in cash or in physical form. However, for benefits enjoyed collectively, in an indivisible, non-cashable basis that are not quantifiable to a specific individual, no individual income tax will be levied in principle. Some benefits can be exempted from individual income tax when such expenses are uniformly accounted for by the enterprise without issuing to the individuals, such as the catering subsidies paid directly by the enterprise to the canteen, the collective travel expenses paid directly to the travel agency etc.

On the contrary, material subsidies that can be quantified under the specific individual should be levied as “Subsidies granted to every employees” in the above provisions when issued to all employees of the enterprise. The “Subsidies granted to every employees”in the “Notice of Living Allowance” does not mean that it must be issued to every employee but it is usually understood as the benefits and subsidies issued by the enterprise to unspecified employees, such as gift certificates, shopping cards, holiday foods, etc. issued to all employees.

Ⅱ Materials and subsidies for every employee during the COVID

For the cash subsidies issued by enterprises for every employee, whether during the COVID period or not, according to the current tax policy, they cannot enjoy the individual tax reduction and exemption, and should be incorporated into the salary and wages income to be taxed as individual income tax. Unless:

(1) They are temporary work subsidies and bonuses obtained by medical personnel and COVID prevention workers participating in the work of COVID prevention and control in accordance with the governmental standards.

(2) In accordance with the relevant provisions of the Individual Income Tax Law, the Implementing Regulations of the Individual Income Tax Law and the Notice of Living Allowance, combined with the confirmation of our lawyers and tax departments, the enterprise shall pay temporary living hardship allowances within a reasonable range to employees who suffer from Covid-19 or have certain difficulties in their own or their family’s life due to Covid-19.

So, how should we identify the goods and products for every employee during the COVID?

In order to support the prevention and control of COVID, the State Administration of Taxation has adjusted the individual income tax policy, according to Announcement on Individual Income Tax Policies to Support Prevention and Control of the Epidemic Caused by Novel Coronavirus Infected Pneumonia (Announcement No. 10 [2020] of the Ministry of Finance and the State Administration of Taxation) (hereinafter referred to as the “Covid-19 Individual Tax Announcement”), In categories (excluding cash) such as medicines, medical supplies, and protective equipment issued by the enterprise to individuals for the prevention of pneumonia caused by the new coronavirus infection is not included in wages and salary income, and will be exempted from individual income tax. This policy is valid until 31 December 2023.Therefore, the analysis of taxation against different types of anti-COVID welfares and subsidies regarding individual tax preferences during the anti-COVID period is as follows:

1. Drugs, medical supplies, protective equipment and other physical goods are exempted from individual income tax

According to the provisions of the “Covid-19 Individual Tax Announcement”, due to the needs of COVID prevention and control, the enterprise issues to individuals in kind (excluding cash) such as drugs, medical supplies, and protective equipment for the prevention of pneumonia infected by Covid-19 infection, which are not included in wages and salary income, and are exempted from individual income tax.

2. Whether the anti-COVID material package is exempted from individual tax needs to be clarified

During the COVID emergency, considering the lockdown, many enterprises have taken into account that employees may face the shortage of daily necessities during the time of work-from-home, and therefore issued COVID-battling bundles to employees, which mainly include food and daily necessities.

Some enterprises have doubts about whether the bundles issued can be exempted from individual income tax, according to the regulations, only anti-COVID materials in category such as medicines, medical supplies and protective equipment used to prevent pneumonia infected can be exempted from individual income tax , and other things issued during the lockdown are not within the scope of individual income tax exemption.

Although according to the provisions of the current “Covid-19 Individual Tax Announce-ment” issued by the tax department, the material packages issued during the COVID should not be exempted from individual income tax. However, according to the definition of subsidies for the suffering in the Notice of Living Allowance, the gift bundles issued during the COVID period are reasonable to be exempted from individual income tax. In order to further implement the requirements for the supply of residents’ daily necessities, the Shanghai Federation of Trade Unions issued the “Notice on the Distribution of Daily Necessities to Employees by Grass-roots Trade Unions During the Epidemic Prevention and Control Period”(hereinafter referred to as the “Notice”) in early April, calling on grass-roots trade unions to distribute daily necessities such as grain, oil, vegetables, meat and eggs to each employee according to the actual situation.

We understand that the original intention of the current tax policy to stipulate that subsidies for every employee cannot be exempted from individual income tax is to avoid enterprises from deliberately issuing “benefits and subsidies|” to employees in the name of evading individual taxes, and only due to certain specific events or reasons that cause certain difficulties to the normal life of taxpayers or their families, the temporary living hardship subsidies issued by their enterprises can be exempted from individual income tax.

In fact, at the moment of COVID control, there are certain practical difficulties in the purchase of necessities such as grain, oil, vegetables, meat and eggs, etc., the materials issued by the neighborhood committee often do not fully meet the needs of daily life, and the materials issued by the enterprises are closer to the temporary living hardship subsidies in the context of the COVID. Therefore, we tend to believe that the materials issued during the COVID can refer to the provisions of Article 1 of the “Notice of Living Allowances” that the temporary living hardship allowance is exempted from individual income tax and is excluded in the wage and salary income and thus is exempt from individual income tax. We also hope that the tax authorities will consider more specific situations affected by the COVID in the future and introduce corresponding policies to give clear tax exemption arrangements for such materials to help enterprises and individuals get through the difficulties.


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Anita Chen
Founding Partner / Executive Partner / PRC Qualified Lawyer / Qualification of Tax Advisor
021-52865288
anita.chen@joius.com
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