Expatriates living on the Chinese mainland for less than one year should pay personal income tax on what they earn in the country, but their income from outside the mainland remains tax-free, a senior official of the Ministry of Finance said Monday.

The taxation Department official said the central government has always observed international practice and avoids double taxation on overseas persons working in the country.

The official spoke under the condition of anonymity.

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

China began to levy personal income tax in 1980. At that time most people earned incomes below the taxable amount and it was mostly foreigners that were paying personal income taxes.

An overhaul of the tax system was initiated in 1994 and uniform tax rates were introduced for both Chinese and overseas individuals. As the economy grew and living standards improved, more and more locals paid income tax.

In 2003, personal income tax accounted for 6.5 percent of the central government's tax revenue, compared with 1.4 percent in 1994. Taxpayers paid 141.8 billion yuan (US$17.1 billion) in income tax to the government.

The ministry official said personal income tax has become an important source of revenue for the central government, which uses it as a leverage to narrow the gap between the rich and the poor.

The system has evolved further and the central government has adopted different tax rates and pre-tax deduction rates on personal income. Taxable personal income falls into 11 major categories, including wages, salaries, returns on investment, business profits and proceeds from property sales.

However, the official said the current system has loopholes that can be used for tax evasion. It also 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. It would try to develop a universal tax rate for all while maintaining differential rates for certain taxable items.

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

(Xinhua News Agency August 2, 2004)