The new year 2021 brings some changes in Chinese social insurance policies. Please find below an update of the most important changes.
Expiration of Covid-19 social insurance exemption policies
In 2020, due to the Covid-19 pandemic, the Chinese government has proactively adopted some measures to support enterprises to overcome economic difficulties. One of the measures is to reduce and/or exempt the payments of social insurance premiums payable by enterprises as employer. According to relevant national and local policies, during the period from February until December 2020, micro, small and medium-sized enterprises were exempted from paying the insurance premiums for pension, unemployment insurance and work-related injury insurance. The premiums for such three insurances, payable by large-sized enterprises as employer, were reduced by half during the period from February until June 2020.
The aforesaid exemption policies for micro, small and medium-sized enterprises have expired on 31 December 2020. As of 1 January 2021, all enterprises are required to resume full payments of social insurance premiums. Therefore, enterprises, especially micro, small and medium-sized enterprises, shall take this into account and make relevant fund/budget preparations to ensure to timely and fully pay the social insurance premiums in 2021.
Tax authority to collect social insurance premiums
In October and November of 2020, the authorities of tax and social insurance administration in 15 provinces and cities, i.e. Beijing, Tianjin, Shanghai, Shenzhen, Jilin, Shanxi, Shandong, Qingdao, Jiangxi, Sichuan, Xinjiang, Tibet, Guangxi, Guizhou and Hunan, released notices requiring that as of 1 November 2020, the social insurance premiums should be levied and collected by local tax authorities. This brings along the following changes:
- Change of entity in charge of collection of social insurance premiums
Previously, social insurance premiums were collected by the social insurance administration authority. The decision on the change of the collection entity to the tax authorities can be traced back to 21 March 2018, on which the Chinese Central Government officially announced that the tax authority should be the sole authority in charge of collecting social insurance premiums with an aim to improve the collection efficiency of social insurance premiums. The Chinese government implemented such decision national wide gradually. In the years of 2018 and 2019, only certain places but not the entire country changed the competent collection authorities. Until November 2020, the move for changing the tax authority to collect social insurance premiums has been completely implemented, and the PRC tax authorities become the sole entities in charge of collection of social insurance premiums in China.
- No change in calculation of social insurance premiums
The change of the competent collection entity does not bring any change to the existing calculation method and contribution rate of the social insurance premium. In China, the employees’ social insurance premium is calculated according to the respective employee’s average monthly salary in the previous year and applicable contribution rates, but subject to minimum and maximum amounts as announced by local governments each year. When calculating the employee’s average monthly salary, base salaries, allowances, overtime payments, bonus and other benefits paid to the employee in cash shall be considered. Therefore, for enterprises that have paid social insurance premiums for employees in line with statutory standard, changing the competent collection entity will not increase their labour costs in relation to social insurance premiums.
- Wake-up call for enterprises lacking compliance in social insurance payments
Although the PRC Social Insurance Law has been implemented for almost 10 years, in practice, still many enterprises did not pay or did not fully pay social insurance premiums for employees as required by law. In addition, enterprises hiring foreigners or Hong Kong, Macao and Taiwan residents often did not enrol these employees in the Chinese social insurance system and did not pay social insurance premiums for them. With the change of the collection entity to the tax authorities, which keep the remuneration data of employees, it can be more easily detected whether enterprises paid social insurance premiums for the employees in compliance with the law or not.
Taking into consideration of Covid-19’s impacts on the economy as well as the State Council’s instruction to local authorities not to actively order enterprises to make up historical outstanding social insurance premiums and not to increase enterprises’ burden in social insurance payments, we believe in the near future right after taking over the collection duties, the tax authorities are unlikely to actively check whether enterprises duly paid social insurance premiums and to order them to make correction in case any incompliance incurred in the past. However, in the long run, by holding the remuneration and social insurance data in the tax authorities’ system, we believe that the tax authorities are inclined to check more actively whether enterprises duly and fully paid social insurance premiums for employees (including foreigners and Hong Kong, Macao and Taiwan residents) in compliance with statutory law, and will require enterprises to make up outstanding social insurance premiums (if any).
With the expiration of the Covid-19 related social insurance exemption policies, as from 2021, enterprises must fully pay the social insurance premiums. From a long-term perspective, the Chinese government is expected to impose stricter supervision on the collection of social insurance premiums. Under such trend, enterprises doing business in China may need to take relevant measures to ensure their compliance in paying social insurance premiums.