From News, page 3, issue no.375, June 7, 2008
Translated by Ren Yujie
Original article: [Chinese]

Salaries set outside of communal agreements would be a huge tax liability for businesses according to a new clause added to the latest draft of Corporate Salary Regulations.

The EO has learned that the current draft said salaries would be counted as costs and freed from taxation only if they were decided through collective negotiations between businesses and workers.

Conversely, salaries not set this way would count as profit and be subjected to income taxes. Thus, based on the current corporate income tax rate of 25 percent, a company would have to pay 250,000 yuan for each 1 million yuan in salaries.

A source at the Ministry of Human Resources and Social Security (MHRSS) told the EO that this clause had received the green light from the MHRSS. However, sources close to the Ministry of Finance (MOF) and State Administration of Taxation (SAT) said the agencies had yet to weigh in.

The law is slated for to be promulgated after the Olympics or towards the end of 2008.

The Compulsory Clause

In market economies, salaries are often set through negotiations between labor unions and businesses. In order to promote such a mechanism in China, the MHRSS has added some compulsory clauses in the latest draft of Corporate Salary Regulations.

The MHRSS source said: "The new clause would not necessarily hurt businesses. Collective salary negotiations also did not equate to rising salaries." The source added that as long as businesses carried out collective salary negotiations, salaries could be raised, remain unchanged, or even be reduced.

Following the procedure, the draft of Corporate Salary Regulations would be submitted to the MOF and SAT for feedback, and handed over to the State Council for review.

Controversy

Professor Liu Shangxi, a researcher at the Ministry of Finance, said the new clause would be hard to implement.

Liu questioned the capacity of regulators in supervising and ascertaining if collective salary negotiations had taken place, adding companies without labor unions would be a problem.

However, the source at the MHRSS said regulators had the power to supervise, and that staff could lodge complaints. Besides this, labor unions could accept or reject collective contracts submitted to labor regulators.

The source stressed that contracts would be treated as legal as long as complaints weren't lodged, and that such complaints could be done so anonymously.

The source added that according to related laws, for businesses without labor unions, staff could vote on representatives from amongst themselves to participate in salary negotiations. Labor unions could naturally form out of such processes.

A Conflict of Precedent?
Some have pointed out the possible conflict of the new clause with a previous law - Corporate Tax Income Law Regulations, which came into effect this past January. Its article 34 said: "reasoable salary expenses of businesses should be deducted from taxation".

The MHRSS source, however, said that since both regulations were under the State Council, the latest one would take precedence over old one.

The source estimated that financial and taxation agencies would agree with the new clause as it would encourage businesses to negotiate with laborers on salary and add taxes.

However, Jin Dongsheng, deputy director of Taxation Science Research Institution at SAT, said such regulations were unreasonable. He said collective salary negotiations was part of employer-employee relationship and a social responsibility. Whereas pre-tax deduction was an economic mechanism, he added, problematic businesses should be punished through administrative penalties but not through taxation.

Liu Shangxi of MOF believed the new clause violated the basic principles of taxation. Only profit could be taxed, he said, adding that salary was obviously a cost, which could not be taxed as profits even if businesses were acting unscrupulously.