China Expat Mandatory Welfare Payments – FESCO’s Expectations

October 17, 2011 Posted by China Briefing Reading Time: 3 minutes

Oct. 17 – Although the government has yet to release the full implementation rules for the inclusion of expatriates into China’s social welfare scheme, there have been a number of pointers issued by various government departments as to likely ways in which this could be resolved. Beijing FESCO, for example, has released information suggesting that the payment of social welfare should commence by foreigners in China from this month, October 2011, with back payments dating from July 2011 and should be collected by year-end when the systems are ready to do so. However, there is not expected to be any late payment charge for the back payments affecting the three months of July, August and September. It is unclear if this extends forward until December.

Our advice during this situation is that employers and employees, both of whom must contribute to this scheme, should set aside provisions for expatriate personnel to make their social welfare contributions from July of this year, and to await further clarification on this matter from their local government prior to making payments. The amounts due vary considerably from city to city, and were subject to a piece provided by us here: Social Insurance Law Implementation Differences Across China.

The social welfare issue, which affects all foreign personnel employed in China, is also the subject of this month’s current issue of China Briefing, “China’s Social Insurance Law” which provides an overview of the new Social Insurance Law, how the new law affects the five mandatory insurance schemes, social security cost-benefit tables, the complications for foreign employees, and differences in implementation. It is available for US$10 from the Asia Briefing Bookstore.

Meanwhile, according to Chris Devonshire-Ellis, principal of Dezan Shira & Associates, the new law may push many foreigners out of compliance in the legalities of their employment in China.

“There is huge resistance to this, as it adds considerable expense burdens to companies, and especially SMEs, at a time when many are struggling due to the economic situation in the U.S. and Europe,” says Devonshire-Ellis. “The compliance impact is expected to be severe as many expatriate employees will cease obtaining Z (work) visas and revert to F (business visit) or L (tourist) visas instead to get around the new obligations. Despite the China pension accrual amounts, which most expats do not regard as pertinent, there are no real benefits that match up to the contributing costs expatriate employees have to make. Consequently, this will result in expatriate employees turning away from official employment status in China, resulting in less income tax generation. It will increase the localization of positions previously held by foreigners, but overall the result will be a drop in taxable income, a brain drain of foreign talent from China, and potential conflicts with visa applications. The entire question of the collection of social welfare from expatriates, while in itself is not a bad thing, has been poorly thought-out and I urge a rethink concerning the identification of the type of expatriates to whom this should be applicable to, and also on the viability of an opt-in or opt-out scheme as an alternative measure.”

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China, Hong Kong, Vietnam and India. For further information or clarification on China’s social insurance policies or the new Social Insurance Law, please email payroll@dezshira.com.

Related Reading

China’s Social Insurance Law
In the October issue of China Briefing Magazine, we summarize some of the key points in the newly implemented Social Insurance Law, which covers a great deal more than just incorporating foreigners into the system. We explain the costs and benefits of participation by foreign employees to both companies and individuals as well as take a look at some of the trends across the country relating to the implementation of the law.