Chinese workers will be allowed to pay income tax for their annuities based on the actual amounts they receive after retirement starting in early 2014, an official statement said Friday.
The move, jointly announced Friday by the Ministry of Finance, the Ministry of Human Resources and Social Security, and the State Administration of Taxation, aims to "promote the development of the country's multi-tiered pension system."
In China, an annuity is a kind of non-compulsory insurance paid by both companies and workers to offer additional guarantees for workers' lives after retirement. It is a supplement to China's basic old-age pension.
Currently, workers enjoying annuities have to pay income tax on them before receiving their monthly salaries.
Under the new policy, employees will not have to pay income tax on the portion of the annuity paid by the employer when receiving their monthly salaries.
The portion of the annuity paid by employees each month will be deductible from their taxable income if the annuity amount is no more than 4 percent of their average monthly salary in the previous year, according to the statement.
Workers also will not have to pay income tax when earnings from annuity investments are distributed to their personal accounts.
According to the policy, which will become effective on Jan. 1, 2014, income tax should only be paid after workers retire based on the actual amount of annuity they receive each month.
In 1991, China announced its goal of building a multi-layer pension system that combines the compulsory basic old-age pension, supplementary pensions (or annuities), and privately purchased insurance.
Chinese enterprises can decide on their own whether to pay annuities for employees.
At present, less than 10 percent of employees are included in the annuity system.
The country plans to accelerate the development of annuities and commercial insurance to build a multi-tiered social security system, according to a landmark reform plan released last month by the Communist Party of China.
Experts believe the new move will not only benefit Chinese workers, but also encourage companies to enter the annuity system.
Zhu Qing, a professor with the Renmin University of China, told Xinhua that the policy will mean a drop in income tax rates for Chinese workers.
As China adopts progressive rates for income tax, annuity income tax in the future will enjoy a lower rate as workers usually receive less after retirement, Zhu said.
"Another advantage for workers is a substantial drop in the income tax's present value," according to Zhu.
Taking into consideration the time value of money, a tax of 100 yuan in the future is worth much less than the same amount of tax paid now, he explained.
Jin Dongsheng, deputy head of the taxation research institute under the State Administration of Taxation, said the tax preference will offer incentives for companies to establish an annuity system, which helps promote the building of a comprehensive old-age pension scheme.
"A key for the annuity system's development is how to realize regulation-based management of annuities," Jin said.
In addition to the tax preference policy, China should also make higher-level laws and regulations on annuities to facilitate standardized annuity management, according to Jin.
