Overseas persons who stay in the Chinese mainland for less than a year should pay personal income tax on what they earned within the country, but their incomes from outside the country will be tax-free, a senior official of the Ministry of Finance said Monday.

The official in charge of the Taxation Department of MOF told Xinhua that China has always observed the international practice and avoids double taxation on overseas persons working in China, adding that China will not levy tax on foreigners' incomes earned outside the country.

Non-residents only have to pay tax on the income they earn within the country, said the MOF official who spoke under the condition of anonymity.

According to Chinese law, both residents and non-residents of the country are subject to income taxation. Non-residents include foreigners and overseas persons from Hong Kong, Macao and Taiwan, who have no residency in the country and live here less than one year. They account for the majority of expatriates in China.

China began in 1980 to levy personal income tax, already widely practiced around the world. At that time, since most Chinese people's incomes were below the taxable amount, overseas people working in China consisted of the majority of the group paying personal income taxes.

China overhauled its personal income tax system in 1994 and adopted uniform tax rates for both Chinese and overseas persons. As the economy grew and people's living standards improved, more and more Chinese residents paid income taxes.

In 2003, personal income tax accounted for 6.5 percent of China's total tax revenue, as compared with 1.4 percent in 1994. Chinese and overseas taxpayers paid a total of 141.8 billion yuan (17.1 billion US dollars) in income tax to the government. The MOF official said personal income tax has become an important source of tax revenue of the Chinese government, which used it as a leverage to narrow the gap between the rich and the poor.

China now adopts different tax rates and pre-tax deduction rates on various types of personal income. Taxable personal income falls into 11 major categories, including wages, salaries, returns of investment, business profits and proceeds from property disposal.

However, the MOF official said the current personal income tax system has a lot of loopholes that can be used for tax evasion and fails to fulfill the principle of equal footing and rational burden.

He said the government is planning to reform the current personal income tax scheme and try to develop a universal tax rate for all while maintaining differential rates for certain taxable items.

However, he noted that inadequate information gathering made it hard for tax offices to monitor the real incomes of individuals. He said the country should accelerate the development of electronic data collection and processing systems on personal incomes.

He said the government needs not haste to reform the current personal income tax system until the necessary conditions are in place.

(Xinhua News Agency August 3, 2004)