(a) Mr Xu, a domestic Chinese, is a designer. He is considering the following four options:
Option A: Joining Delta Ltd as a manager with a monthly salary of RMB40,000 and an annual bonus of RMB100,000 payable in December each year.
Option B: Providing services to Delta Ltd as a consultant for a consultancy fee of RMB50,000 per month.
Option C: Setting up his own sole proprietorship. He will pay himself a monthly salary of RMB20,000 from this sole proprietorship. For 2014 the net profit of the sole proprietorship after charging Mr Xu’s salary is expected to be RMB420,000.
Option D: Setting up a limited company, Xupa Ltd. He will pay himself a monthly salary of RMB20,000 from Xupa Ltd. For 2014 the net profit of the company after charging Mr Xu’s salary is expected to be RMB420,000. Xupa Ltd will pay enterprise income tax at the rate of 25% and distribute all of its profit after tax to its shareholder, Mr Xu, as a dividend.
Required:
Calculate the individual income tax (IIT) payable by Mr Xu for 2014 under each of the four options.
Note: Ignore value added tax and business tax.
Mr Xu
Individual income tax (IIT) for 2014
Option A IIT on salary each month is RMB8,195 ((40,000 – 3,500) x 30% – 2,755) 1
Find tax rate for bonus: 100,000 ÷ 12 = 8,333 → 20% 0·5
IIT on bonus is RMB19,445 (100,000 x 20% – 555) 1
Total IIT for 2014 is RMB117,785 (8,195 x 12 + 19,445)
Option B IIT on consultancy fee per month is RMB10,000 ((50,000 x (1 – 20%) x 30% – 2,000) 1
Total IIT for 2014 is RMB120,000
Option C Taxable income of the sole proprietorship is RMB618,000 (420,000 + 20,000 x 12 – 3,500 x 12)
[The salary of Mr Xu is not deductible]
IIT of sole proprietorship is RMB201,550 (618,000 x 35% – 14,750)
Option D IIT on salary each month is RMB3,120 ((20,000 – 3,500) x 25% – 1,005) 1
The dividend payable to Mr Xu is RMB315,000 (420,000 – 420,000 x 25%) 1
IIT on the dividend is RMB63,000 (315,000 x 20%) 0·5
Total IIT for 2014 is RMB100,440 (3,120 x 12 + 63,000)